Accrue Explained: Definition, How It Works, and Top 2 Types of Accruals in 2025

What Does It Mean to Accrue?

To accrue means to gradually accumulate something over a period of time. In finance and accounting, this term is mostly used to describe the buildup of interest, income, or expenses for individuals or businesses. For instance, interest in a savings account accrues daily, increasing the total balance over time. The concept of accruing is a fundamental part of accrual accounting, which is widely adopted by companies worldwide as the standard method for recording financial transactions.

Key Points to Remember

• Accrue refers to the process of accumulating financial amounts like interest, income, or expenses over time.
• Financial items that accrue are recorded even if the actual payment or receipt happens in the future.
• Accrual accounting distinguishes between accrued revenues (earned but not yet received) and accrued expenses (incurred but not yet paid).
• Accrued revenue occurs when a company delivers goods or services but has not yet received payment.
• Accrued expenses include costs recognized before payment, such as unpaid salaries or interest.

How Does Accrue Work in Finance?

When financial amounts accrue, they build up to be settled at a later date. Both assets and liabilities can accrue over time. In accounting, accruals are adjustments made to record revenues earned and expenses incurred within the correct accounting period, regardless of cash flow timing. This practice aligns with the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Accrual entries differ from unearned entries; accrued entries recognize that the financial event has already taken place, but the payment is pending. The Financial Accounting Standards Board (FASB) governs the rules on which accruals must be recorded, including accounts payable, accounts receivable, goodwill, future tax liabilities, and anticipated interest expenses.

Why Are Accruals Important?

Accrual accounting provides a more accurate picture of a company's financial health by recognizing economic activities as they happen rather than when cash changes hands. This method ensures that financial statements reflect all earned revenues and incurred expenses within the reporting period, leading to better decision-making.

Unlike cash accounting, which records transactions only when cash is exchanged, accrual accounting captures credit transactions and future liabilities, offering a comprehensive overview of a company’s financial position. While small businesses may opt for cash accounting, most companies prefer accrual accounting for its detailed insight.

For example, if a business sells $100 worth of products on credit in January, accrual accounting records this revenue in January, even if payment is received later or not at all.

Main Types of Accruals

Accruals generally fall into two categories: accrued revenue and accrued expenses.

Accrued Revenue

Accrued revenue represents income earned but not yet received in cash. This happens when goods or services are delivered but payment is pending. Businesses with significant credit sales often have high accrued revenues. For example, if Company ABC hires Consulting Firm XYZ for a $150,000 project payable upon completion, the revenue accrues over the project duration even though payments are made after milestones.

Accrued Expenses

Accrued expenses are costs recognized before payment is made. These expenses are recorded in the general ledger and reflected on financial statements to match costs with the period they relate to. Common accrued expenses include:

• Interest expenses accrued monthly before invoice receipt.
• Supplier costs for goods or services received on credit.
• Employee wages or salaries earned but not yet paid.

Accruing expenses like interest, taxes, and wages ensures that operating costs are accurately stated, preventing overstatement of net income. For example, if payroll is processed on January 28 but employees work additional days in January, those extra days’ salaries are accrued to reflect January’s true expenses.

The purpose of accrual accounts is to align expenses with the period they are incurred, providing better expense forecasting and financial planning.

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