what does accrued mean in accounting

Imagine a company that pays its employees on the 5th of every month for work done in the previous month. On December 31st, the employees have already worked for three weeks, but they won’t get paid until January 5th. From an accounting perspective, the company has incurred an expense for that labor in December, even though the cash hasn’t left the bank yet. This is the heart of the accrual concept.

So, what does accrued mean in accounting? In simple terms, it means recognizing a revenue or expense in your financial records when it is earned or incurred, regardless of when the cash is actually received or paid. This approach provides a much more accurate picture of a company’s financial health during a specific period.

What Does Accrued Mean in Accounting for Your Books?

When you accrue something, you are essentially making an entry to record an economic event that has already happened. This is a core principle of accrual accounting, which is the standard for most businesses. There are two main types of accruals: accrued expenses and accrued revenues. An accrued expense, like the employee salaries example, is a cost you have built up but haven’t yet paid. An accrued revenue is income you have earned by providing a service or product but haven’t yet billed the customer for.

Why Accruals Matter for Your Financial Picture

Using accruals moves you beyond simply tracking cash in and out. It allows you to see the true profitability of a specific month or quarter. For instance, if you only looked at cash, December might seem incredibly profitable because you received a large payment, but you wouldn’t see the large stack of bills and payroll you’ve accumulated. Accrual accounting matches revenues with the expenses incurred to generate them, giving you a clear, timely, and fair view of your company’s performance.

Putting Accruals into Practice

Recording an accrual involves making an adjusting journal entry at the end of an accounting period. For an accrued expense like utilities, you would debit the utilities expense account to increase the expense on your income statement. You would then credit an accrued liabilities (or accounts payable) account to show that you owe money. This entry ensures the expense is recorded in the correct period. When you pay the bill later, you then reverse the liability.

By embracing the concept of accruals, you move from a simple checkbook view of your finances to a sophisticated management tool. It provides the clarity needed to make informed decisions, ensuring that your financial statements genuinely reflect your business’s activities and obligations.