An accrual records something in the period it relates to rather than the period it is paid. If work is done in one month but paid in the next, an accrual puts the cost in the month the work happened.
What it means
Accrual accounting matches costs to the period that caused them, which gives a truer picture than waiting for cash to move. In payroll this shows up as accrued wages, accrued leave and accrued statutory liabilities - amounts owed at period-end that have not yet left the bank account.
Where it fits in
When a pay run is calculated, the cost and the related liabilities are accrued in the accounting records even though PAYE is paid the following month and net pay may clear a few days later. The accrual sits in a liability account until the payment reverses it.
Key rules
- Recognises a cost or entitlement when earned or incurred, not when paid.
- Underlies accrued wages, accrued leave and accrued statutory liabilities.
- Posts to a liability account at period-end and is cleared when payment is made.
- The opposite approach to cash accounting, which waits for the money to move.
