Accruals are revenues earned or expenses incurred which impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities. Accrual accounts include, among many others, accounts payable, accounts receivable, accrued tax liabilities, and accrued interest earned or payable.
By recording accruals, a company can measure what it owes in the short-term and also what cash revenue it expects to receive. It also allows a company to record assets that do not have a cash value, such as goodwill. The main difference between accrual accounting and cash accounting lies in the period in which revenues and expenses are recorded as having occurred.
The accrual concept is considered to be standard accounting practice for large companies and is supported by both the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). These accounting frameworks provide guidelines to businesses around the world on how to account for revenues and expenses apart from just using cash receipts.
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