Definition of Accruals
The accrual of expenses and liabilities refers to expenses and/or liabilities that a company has incurred, but the company has not yet paid or recorded the transaction. The accrual of an expense will usually involve an accrual adjusting entry that increases a company's expenses and increases its current liabilities.
The accrual of revenues and assets refers to revenues and/or assets that a company has earned, but the company has not yet received the money nor has it recorded the transaction. The accrual of revenues will usually involve an accrual adjusting entry that increases a company's revenues and increases its current assets.
Example of an Accrual as a Current Liability
Assume that a company has an emergency sewer repair on December 30. The plumbing contractor said the bill will be finalized and mailed to the company on January 10; however, the bill will be approximately $6,000. The company will need to accrue the expense incurred and the related current liability before the December 31 financial statements are prepared. The adjusting entry will debit Repairs Expense for $6,000, and credit Accrued Expenses Payable for $6,000.
Examples of other expenses that usually need an accrual adjusting entry resulting in a current liability include wages, utilities, bonuses, taxes, and interest.
Example of an Accrual as a Current Asset
Assume that during December a company has earned interest of $5,000 on its investment in U.S. Treasury bills. However, the interest will be received by the company on February 15. The company needs to accrue the revenue it earned and the related current asset before the December 31 financial statements are prepared. The adjusting entry will debit Interest Receivable for $5,000, and credit Investment Income for $5,000.