Can anybody explain what accruals stand for? Investopedia did not help much, still don’t get it. Thanks. And why is it called accruals.
Ill just talk about liability accruals although you can make them for assets too. A company has a YE that is 6/30/08. They are paying for repairs on their capital assets and the work is being done before 6/30/08 but the company has not received an invoice yet therefore they have to estimate the expense (matching principle) to record the expense in the correct period. So you Debit expense and Credit liabilities. This is an accrual because you’ve not received the invoice yet so you’re estimating how much the cost will be for the repairs being performed prior to 6/30/08 but invoices have not been received. There are other examples of accruals too…
Sorry, I’m too stupid to understand that. Thanks for the answer though.
Ok, to make it simple - for expenses only: Accrual is recognition of expense for which you have not yet paid. Let’s say you have $300 rent for a July that you will not pay until August 5. During July, you will accrue $300 in rent expense, even though you still have the cash.
The same works for income. Take money market funds, for example. Assume interest is paid to the investor once a month on the first of the month. Every day the investor’s money is invested in that fund, roughly 1/30th (or 31st) of the interest is “accrued.” This just means that the investor has “earned” the interest, but it hasn’t been paid yet. So here are some hypothetical interest accruals: 6/2 - $10.00 6/3 - $10.30 6/4 - $9.50 After the third day, $29.80 has been accrued, even though no cash has actually changed hands. The interest will keep accruing like this until the first of the month comes when all of the accrued interest is paid out. With regard to accounting, it’s simply a method of making sure revenues and expenses are accounted for in the period in which they were “accrued,” instead of accounting for it in the period in which cash changed hands. This is done to make sure companies don’t manipulate cash flows to make their income statements prettier.
got it, thanks all
its those things in the CFO section of the stmt of cash flow dude! higher accrual liabilities = more cash flow!