# Accrue: Definition, How It Works, and 2 Main Types of Accruals

![Accrue](https://www.investopedia.com/thmb/fWiB1CgluP2ZsYKLccjH7QAOvog=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_Accrue-edit-a38abe5749d14c28a1e9b3ae24d18477.jpg)

*— Mira Norian / Investopedia*

## What Is Accrue?

To accrue means to accumulate interest, income, or expenses over time. The term "accrue" is often related to accrual accounting, which has become the standard accounting practice for most companies.

The main types of accruals are accrued revenues and accrued expenses. Companies with significant credit card transactions usually have high accrued revenues because they have sold a good or service but have not received payment. Salaries are an accrued expense if the workweek doesn't align with monthly financial reports and payroll.

Accrual accounting provides a more accurate picture of financial health than cash accounting. This is because accrual accounting recognizes economic events regardless of when cash transactions occur, while cash accounting records transactions only when cash changes hands.

Read on to learn how to benefit from understanding these concepts, such as managing your financial records more effectively.

### Key Takeaways

*   Accrual accounting provides a more accurate depiction of a company's financial health by recognizing revenue and expenses when they are incurred, regardless of when cash transactions occur.
*   Accrued revenue arises when a company delivers a product or service but has yet to receive payment, illustrating how businesses anticipate income before cash is received.
*   Accrued expenses occur when a business recognizes costs before they are paid, such as interest expenses, supplier costs, and wages, helping to match expenses with the time period in which they were incurred.
*   Understanding the difference between cash accounting and accrual accounting is crucial, as the former records transactions only when cash changes hands, potentially overlooking future financial obligations or earnings.
*   The use of accruals is mandated by regulatory bodies such as the Financial Accounting Standards Board (FASB) to ensure compliance with various accounting principles like GAAP and IFRS.

## Understanding the Accrual Process

When something financial accrues, it essentially builds up to be paid or received in a future period. Both [assets](https://www.investopedia.com/terms/a/asset.asp) and [liabilities](https://www.investopedia.com/terms/l/liability.asp) can accrue over time. In finance, "accrue" is the same as an "accrual," following the accounting rules set by [Generally Accepted Accounting Principles (GAAP)](https://www.investopedia.com/terms/g/gaap.asp) and [International Financial Reporting Standards (IFRS)](https://www.investopedia.com/terms/i/ifrs.asp).

An [accrual](https://www.investopedia.com/terms/a/accruals.asp) adjusts accounting records for revenues earned but not received, and [expenses](https://www.investopedia.com/terms/e/expense.asp) incurred but not paid. Think of accrued entries as the opposite of unearned entries—with accrued entries, the corresponding financial event has already taken place but payment has not been made or received.

The [Financial Accounting Standards Board (FASB)](https://www.investopedia.com/terms/f/fasb.asp) decides on accepted and mandatory accruals and interprets GAAP. Accruals include accounts payable or receivable, [goodwill](https://www.investopedia.com/terms/g/goodwill.asp), tax liabilities, and future interest expenses.

## Important Considerations in Accrual Accounting

The accrual accounting procedure measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur, giving a better picture of the company's [financial health](https://www.investopedia.com/terms/f/financial-health.asp) and causing asset or liability adjustments to "build up" over time.

This is in contrast to the [cash method of accounting](https://www.investopedia.com/terms/c/cashaccounting.asp), where revenues and expenses are recorded when the funds are actually paid or received, leaving out revenue based on credit and future liabilities. Cash-based accounting does not require adjustments.

While some very small or new businesses use cash accounting, companies normally prefer the accrual accounting method. Accrual accounting gives a far better picture of a company’s financial situation than cost accounting because it records not only the company’s current finances but also future transactions.

If a company sells $100 of product on credit in January, it should record the amount then, using accrual accounting, to avoid delays or potential [bad debts](https://www.investopedia.com/terms/b/baddebt.asp).

## Main Types of Accruals: Revenue and Expense

 Accruals are either revenue- or expense-based.

### Accrued Revenue

Revenue accruals represent income or assets (including non-cash-based ones) yet to be received. These accruals occur when a good or service has been sold by a company, but the payment for it has not been made by the customer. Companies with large amounts of credit card transactions usually have high levels of accounts receivable and high levels of accrued revenue.

Assume Company ABC hires Firm XYZ for a project taking three months to complete. The fee for this job is $150,000, to be paid upon completion. While ABC owes XYZ $50,000 after each monthly milestone, the total fee accrues over the duration of the project instead of being paid in installments.

### Accrued Expense

A business can make a [general ledger](https://www.investopedia.com/terms/g/generalledger.asp) accrual entry when it recognizes an expense before payment. The expense may also be listed as accrued in the balance sheet and charged against income in the [income statement](https://www.investopedia.com/terms/i/incomestatement.asp). Common types of accrued expense include:

*   Interest expense accruals—these occur when a company owes monthly interest on debt prior to receiving the monthly invoice.
*   Supplier accruals—these happen if a company receives a good or service from a supplier on credit and plans to pay the supplier at a later date.
*   Wage or salary accruals—these expenses happen when a company pays employees prior to the end of the month for a full month of work.

Interest, taxes, and other payments sometimes need to be put into accrued entries whenever unpaid obligations should be recognized in the financial statements. Otherwise, the operating expenses for a certain period might be understated, which would result in [net income](https://www.investopedia.com/terms/n/netincome.asp) being overstated.

Salaries are accrued whenever a workweek does not neatly correspond with monthly financial reports and payroll. For example, a payroll date may fall on Jan. 28. If employees have to work on Jan. 29, 30, or 31, those workdays still count toward the January operating expenses. Current payroll has not yet accounted for those salary expenses, so an accrued salary account is used.

Different reasons exist for accruing specific expenses. The general purpose of an accrual account is to match expenses with the [accounting period](https://www.investopedia.com/terms/a/accountingperiod.asp) during which they were incurred. Accrued expenses are also effective in predicting the amount of expenses that the company can expect to see in the future.

## The Bottom Line

In the context of finance, "accrue" means to accumulate interest, income, or expenses over time. The term is related to accrual accounting.

The main types of accruals are accrued revenues, which are income earned but not received, and accrued expenses, which are expenses recognized before being paid. Accrued revenue lets businesses anticipate income before cash is received. Accrued expenses let businesses recognize costs before they are paid.

Accruals are crucial because they provide an accurate picture of a company’s financial health and ensure that financial statements reflect true economic events.

Accrual accounting records transactions when they occur rather than when cash is exchanged, while cash accounting records transactions only when cash changes hands. Accrual accounting provides a more comprehensive and accurate view of a company's financial performance, but it requires adjustments. Cash accounting doesn't require adjustments and is sometimes preferred by small or new businesses.

Accrual accounting is more complex than cash accounting, but it provides businesses with better financial insights and aligns income and expenses with the periods when they're incurred.

> **Article Sources**
>
> 1.  Financial Accounting Standards Board. "[Standards](https://www.fasb.org/cs/Satellite?c=Page&cid=1176157086176&pagename=FASB%2FPage%2FSectionPage)."