what does accruals mean in accounting terms?
Other - Business & Finance - 2 Answers
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Answer 1 :
In extreme basic terms it means include costs not yet paid, but due. An example is you know you will have to pay your tax bill in January for wages paid up to December. You have not yet written the cheque to the revenue so you have not yet debited your accounts, But you know what you are due to pay, so you include it as current cost.
Answer 2 :
Accruals are liabilities and non-cash assets that you carry forward into the next period. Accrual method in accounting lets us keep assets and liabilities in the periods that they actually belong. Cash method would have you place them at the moment the payment is made, regardless of when the revenue was generated or the liability was incurred. An example is wages payable. Our workers have worked for us over the last week and we owe them the pay for the hours worked but we are not going to pay them until the first week of the next month. We have accrued the debt. We will carry it forward into the next month when we will cut the checks on payday. We pre-paid our insurance for the year. We carry the insurance forward and expense it in each month as it gets used. At the time we paid for it we had an accrued asset (prepaid insurance) and we reduce that account as we expense it each month. Imagine you are working on a long-term project, such as building a dam. As you build it you do not accumulate the dam as inventory. You accrue revenue as a percentage of completion. The revenue is earned in the month when the work is actually performed even though you get paid on another schedule.
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