Last reviewed: July 2026.
Accrual accounting records the economic effects of transactions in the periods in which they occur, even when cash is received or paid in a different period. It produces receivables, payables, accruals, prepayments, contract liabilities, depreciation and other adjustments needed to measure performance and financial position.
The traditional phrase “matching concept” is often used to explain that costs are recognised in the periods receiving benefits or related to recognised activity. Modern IFRS analysis begins with the definitions and recognition of assets, liabilities, income and expenses; it does not justify creating an asset simply to smooth or match expenses.
Accrual basis versus cash basis
Cash-basis records focus on receipts and payments. Accrual accounting records rights, obligations and consumption when they arise. A profitable accrual result can therefore coexist with weak cash flow, and a large cash receipt may create a liability rather than income.
General-purpose IFRS financial statements, other than cash-flow information, are prepared using the accrual basis under the applicable requirements.
Common accrual situations
| Situation | Cash timing | Accrual accounting result |
|---|---|---|
| Credit sale made before payment | Cash received later | Recognise revenue and a receivable when the performance requirement is satisfied. |
| Electricity used before invoice arrives | Cash paid later | Recognise expense and an accrual/payable in the period of use. |
| Insurance paid in advance | Cash paid before use | Recognise a prepayment and expense it over the coverage period. |
| Customer pays before service | Cash received before performance | Recognise a contract liability or deferred income until the obligation is satisfied. |
| Non-current asset purchased | Cash may be paid immediately | Recognise the asset and allocate depreciation over useful life. |
Accrued expenses
An accrued expense arises when goods or services have been received but the invoice or payment occurs later. At year end, estimate the amount consumed and record:
- Debit the relevant expense
- Credit accrual or payable
When the invoice is recorded, clear or adjust the accrual so the expense is not duplicated.
Prepaid expenses
A prepayment arises when cash is paid before the related service or benefit is consumed. The unused portion is an asset because it represents a right to future service or benefit.
For example, if 12,000 CU of annual insurance is paid on 1 October and the year ends on 31 December, three months—3,000 CU—are expensed and 9,000 CU is carried as a prepayment, assuming even coverage.
Accrued income and receivables
Income may be earned before it is invoiced or collected. When recognition requirements are satisfied, an entity records income and a receivable or contract asset as appropriate. The classification depends on whether the right to consideration is unconditional or depends on further performance.
Read the IFRS 15 revenue recognition guide for the distinction between receivables, contract assets and contract liabilities.
Income received in advance
Cash received before delivering goods or services is not automatically revenue. It generally creates a liability representing the obligation to perform or refund. Revenue is recognised as control of promised goods or services transfers under the relevant requirements.
Depreciation as an accrual adjustment
Buying equipment creates an asset rather than an immediate expense when recognition criteria are met. Depreciation then allocates the depreciable amount systematically over useful life according to the consumption pattern. This recognises asset use in the periods receiving benefits.
See the depreciation methods guide and fixed asset disposal entries.
Worked year-end adjustment
A business has paid 22,000 CU for electricity during the year. The opening accrual was 1,500 CU and the closing accrual is estimated at 2,300 CU. Current-year electricity expense is:
Cash paid + closing accrual − opening accrual
22,000 + 2,300 − 1,500 = 22,800 CU.
The closing entry increases expense by 2,300 CU and recognises a liability. The opening accrual is effectively settled within the cash paid during the year.
Estimation and reversal
Accruals often require estimates. Use invoices, contracts, usage data, supplier statements and historical patterns. Differences between an accrual and the final invoice are generally adjusted when better information becomes available.
Reversing entries can simplify processing in the next period, but the system must prevent duplicate expense recognition. Review material estimation changes under IAS 8 accounting policies and estimates.
Period-end accrual checklist
- unrecorded supplier invoices and goods received;
- payroll, bonuses and leave obligations;
- utilities, interest and professional fees;
- prepaid insurance, licences and rent;
- earned but unbilled revenue;
- customer advances and deferred income;
- depreciation, amortisation and impairment;
- inventory cut-off and goods in transit.
Connect these adjustments to the trial balance and financial statement process and the dedicated accruals and prepayments guide.
Common mistakes
- recognising revenue when cash is collected rather than when requirements are met;
- expensing an entire prepayment immediately;
- failing to reverse or clear prior accruals;
- creating “matching” assets that do not meet the asset definition;
- using unsupported estimates;
- recording invoices in the wrong period because cut-off was ignored.
Accruals and cash-flow analysis
Accrual profit and operating cash flow answer different questions. A rise in receivables can increase revenue and profit while delaying cash. A rise in payables can support cash temporarily even though expenses are already recognised. Review working-capital movements when explaining why profit and cash differ.
Related Accounting Support guides
Key takeaway
Accrual accounting reports economic activity when rights, obligations and consumption arise. It separates performance from cash timing and produces a more complete view of receivables, payables, assets, liabilities, income and expenses.
Official references: IFRS Conceptual Framework and ACCA Principles and Concepts of Accounting.