“What is an accrual in accounting?”

Accruals are adjustments that take into account costs or revenues that relate to your current financial year but have not yet been paid or invoiced to you.

The purpose of accruing for costs is to “match” the relevant business cost with the income, and recognise revenues and expenses in the same period for which they were incurred.

Working example:

You made a sale to a customer and raised the invoice for £1,000 in the month of April.

In order to facilitate that sale, you have had to purchase stock worth £500.

The invoice for the stock item does not come until May.

 In this case you would need to “match” the cost and the income in the same month, so your accountant accrues for the cost of £500 in April.

 Your Profit and Loss account for April would then reflect:

 Sales £1,000

Costs £500

Profit £500

 The accrual is recorded in your Balance Sheet under current liabilities as £500 and when the £500 invoice is received in May, this is offset with the accrual to reduce it to Nil.  There are no transactions in your Profit and Loss account for May.

The definition of a prepayment.