Over time, financial transactions have been reshaped into innovative accounting methods. Accrue is one such method that provides an overall picture of a company's lending and borrowing performance.
Continue reading for in-depth information about accrued meaning in accounts, its two main types, and examples that will help you better understand the method.
What is accrue?
You might be thinking, ‘What is the meaning of accrued’? Accrued refers to holdings gained or accumulated over time. Think of it as a tiny snowball that gets bigger while rolling down the hill.
Accrual in accounting applies to money that is earned or spent but has not been paid yet. It is similar to things piling up to be settled later. Accrual is crucial as it gives a more accurate picture of the company’s financial health.
Key takeaways
Accrue refers to the money that is earned or spent but has yet to be paid
It is crucial for providing an overview of the company’s financial health
There are two main types of accruals: accrued revenues and accrued expenses
Accrual revenues are the money that a company has earned but has not yet been paid by customers
Accrual expenses are the money that is accrued but yet to be paid by a business
How accrual works
Accruals are money building up to be paid or received in the future. This applies to the things that you own (assets) and things you owe (liabilities). They are synonyms for accrual accounting, which tracks these situations.
For instance, when you have done the work but are yet to be paid or owe money for something you have already bought, that is accrual.
Special considerations
Accrued meaning in accounts provides a decent overview of the company’s financial health, regardless of when the actual transactions have occurred.
There are two main types of accounting: accrual accounting and cash accounting. Cash accounting refers to recording revenues and expenses when funds are actually paid for or received. And unlike accrual accounting, it does not require adjustments.
On the other hand, accrual accounting is the most preferred accounting method by companies worldwide because it records both the company’s current finances and future transactions. For instance, if the company sold its services for Rs. 20,00,000 in March, it would record the transaction before receiving the money, preventing any hidden bad debts.
Types of accrues
Accruals are divided into two sub-categories:
Accrued revenue
Accrual revenue refers to money a company has earned but has not received from customers. For instance, ABC is a consulting firm hired for a 3-month project for a total fee of Rs. 18,00,00,000. Even though they will not get the full payment until the project is finished, they have earned a portion of the revenue with each month of work completed. Accrual accounting allows them to recognise earned revenue even though they have yet to receive cash.
It is like money building up in your account because you have done some work but have not been paid yet, which is typical for companies that deal with credit cards or do not get paid right away for their services.
Accrued expense
On the other hand, accrued expenses are the costs a business owes but has yet to pay for. Imagine you buy office supplies on credit. You will owe money later, but you have already used the supplies for your work. Accrual accounting lets the company recognise that expense (the supplies), even though they have not paid cash for them yet.
They are mainly used to show a company's financial health accurately. If they do not account for these upcoming bills, their costs might look lower than they really are, making their profits seem higher than what they are in reality. This gives you a better overview of what is the meaning of accrued.
Conclusion
Accrual accounting is crucial because it shows a more realistic picture of a company's financial health by considering both earned but unpaid income (accrued revenue) and incurred but unpaid expenses (accrued expenses).
This accrued meaning in accounts also gives a clearer view of a company's performance and future obligations, unlike cash accounting, which only focuses on what money has already been exchanged.
