Definition
Accruals (Accounting)
Accruals are revenues earned or expenses incurred that are recognised in the accounts before the related cash is received or paid, following accrual accounting.
Under accrual accounting, transactions are recorded when they occur, not when cash moves, to match income with the expenses that generated it. Accrued income (earned but not yet received) and accrued expenses (incurred but not yet paid) bridge the gap between performance and cash flow.
Accruals are why reported profit differs from cash, the difference the cash flow statement explains. A persistently large gap between profit and operating cash flow, sometimes called high accruals, can be a warning sign of aggressive revenue recognition or poor earnings quality.
Related terms
- Cash Flow StatementThe cash flow statement reconciles a company's profit to its actual cash movements, split into operating, investing and financing activities.
- Operating Cash FlowOperating cash flow is the cash a company generates from its core business operations, before investing and financing activities.
- Revenue RecognitionRevenue recognition is the accounting principle determining when and how much revenue a company records, based on the transfer of goods or services to customers.
- Deferred RevenueDeferred revenue, or unearned income, is money received from customers for goods or services not yet delivered, recorded as a liability until earned.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.