Accrue

Accrual accounting records revenue when it is earned, and expenses when they are incurred, rather than waiting until money is actually received or paid.

• Accrued revenue is income a company has earned but has not yet received.
• Accrued expenses are costs a company has incurred but has not yet paid.
• Accrual accounting helps show income and expenses in the accounting period to which they relate.
• For example, if a company provides services worth ₹20,00,000 in March but receives payment later, the revenue is generally recognised when it is earned.
• There are 2 main types of accruals discussed here: accrued revenue and accrued expenses.
   

In accounting, accrue means to record income when it is earned or an expense when it is incurred, even if the related cash has not yet been received or paid. This method helps businesses record financial activity in the period in which it actually takes place.
You can think of accrual as an amount that builds up over time and will be received or paid later. For example, a company may finish work for a client in March but receive the payment in April. Since the work was completed in March, the income is generally recognised in March under accrual accounting.
The same concept applies to expenses. Suppose a business receives and uses office supplies in March but does not pay the supplier until April. The expense is generally recorded in March because that is when the business received and used the supplies.
Accrual accounting therefore does not depend only on when money enters or leaves a company's bank account. Instead, it focuses on when income is earned and when expenses are incurred.
This approach helps match revenue and related expenses with the correct accounting period. As a result, a company's financial statements can provide a clearer view of its income, expenses, and overall financial performance during a particular period.
 

Accrual accounting works by recording revenue when it is earned and expenses when they are incurred, even if the actual payment takes place later. The timing of the business activity is therefore more important than the timing of the cash transaction.
For example, suppose a company completes a service for a customer in March but receives the payment in April. Under accrual accounting, the revenue is generally recognised in March because the company completed the work and earned the income during that month.
The same principle applies to expenses. If a business receives goods or services in March but pays for them in April, the related expense is generally recognised in March because that is when the cost was incurred.
Consider another simple situation. A company may receive an electricity bill after the end of a month, even though it used the electricity during that month. Under accrual accounting, the expense relates to the period in which the electricity was used, rather than only to the date on which the bill is eventually paid.
In this way, accrual accounting connects financial transactions to the period in which the underlying activity happens. Income is recorded when it is earned, while expenses are recorded when the business becomes responsible for them.
In simple terms, accrual accounting focuses on when the income is earned, or the cost is incurred, rather than only on the date money enters or leaves the bank account. This helps businesses understand their financial performance for a particular accounting period more clearly.
 

Accrual accounting and cash accounting record transactions at different times.
Under cash accounting, revenue is generally recorded when cash is received, while expenses are recorded when cash is paid. Under accrual accounting, revenue and expenses are recognised when they are earned or incurred, even if payment happens later.
For example, suppose a company provides services worth ₹20,00,000 in March but receives payment later. Under accrual accounting, the company generally recognises the revenue when the service is earned rather than waiting for the cash payment.
This helps match the company's income and expenses with the accounting period in which the underlying activity took place.
 

The 2 main types of accruals discussed here are accrued revenue and accrued expenses.

Accrued revenue

Accrued revenue is income that a company has earned but has not yet received from the customer.
For example, suppose ABC is a consulting firm working on a 3-month project with a total fee of ₹18,00,00,000. If the firm earns part of the fee as it completes the work each month but receives payment later, the earned amount may be recognised as accrued revenue.
In simple words, the company has already performed the work and earned the income, but the money has not yet been received.

Accrued expense

An accrued expense is a cost that a business has incurred but has not yet paid.
For example, imagine a company receives and uses office supplies on credit. The business has already incurred the cost of those supplies even though it will pay the supplier later.
Accrual accounting allows the company to recognise the expense when it is incurred rather than waiting until payment is made.
Recording these expenses is important because leaving them out could make a company's expenses appear lower and its profit appear higher for that accounting period.
 

Accrual accounting helps businesses record income and expenses in the period in which they are earned or incurred, even if payment happens later. It includes accrued revenue, which is income earned but not yet received, and accrued expenses, which are costs incurred but not yet paid. By recording transactions this way, businesses can match financial activity with the correct accounting period and get a clearer view of their revenue, expenses, obligations, and overall financial performance.