Accrual Definition and Accounting Treatment
Accrual Definition – “An amount incurred as an expense in a given accounting period but not paid by the end of that period”.
In simple words, accrual refers to the revenues and expenses which does not record in books of accounts when they are paid. However, such expenses or revenues affect the assets and liabilities of the business firm. But, as per accrual basis of accounting, revenue is recognize when product or service is deliver to customer.
Revenues and expenses both can be of accrual nature. Accrual expenses means the expenses for which firm has receive payment but has not make payment. On the other hand, accrual revenue are those for which the product is delivered, but the payment is not yet made to the firm.
The most important thing to note is that, accruals are recorded in the accounting period when they are realize not when they are paid.
Treatment of Accrual in Balance Sheet
Expenses accrued in nature appears in the liabilities of the Balance Sheet under the head Current Liabilities. On the other hand accrual incomes are shown in the Assets side under current assets head.
Accrual Journal Entry
Case 1 – Accrual Income
Accrued Income A/c Dr.
To Income A/c
Case 2 – Accrued Expenses
Expense A/c Dr.
To Expenses Accrued A/c
Example of Accrual
To understand accrual definition more clearly, let’s discuss an example. XYZ Ltd is a garment manufacturing company. The total salaries that the companies need to pay to its employees is Rs. 1,00,000. However Rs. 50,000 are expenses that are not yet paid.
So , the journal entry will be
Salaries A/c Debit 50,000
To Accrual Expenses A/c 50,000