Concept
What Are Accruals?
Accruals occur when revenue is earned or expenses are incurred BEFORE cash changes hands. The adjusting entry records revenue or expense that has accumulated but not yet been recorded.
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FARLesson 3 of 5
Accruals: Accrued Revenues & Accrued Expenses
Example
Accrued Interest Revenue
A company holds a $10,000 note receivable at 6% annual interest. By year-end, 2 months of interest has accrued: $10,000 × 6% × 2/12 = $100. Adjusting entry: Debit Interest Receivable $100, Credit Interest Revenue $100.
Example
Accrued Wages
Employees earn $5,000 in wages during the last week of December, but payday is January 3. Adjusting entry on Dec 31: Debit Wages Expense $5,000, Credit Wages Payable $5,000.
Key Point
Accruals vs. Deferrals
Deferrals: cash first, then recognize. Accruals: recognize first, cash comes later. Both ensure the correct period gets the revenue or expense.
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