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Concept
Accrual
Summary
In finance, an accrual (accumulation) of something is the adding together of interest or different investments over a period of time.
For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a revenue in its current income statement still for the fiscal year of the delivery, even though it will not get paid until the following accounting period. The proceeds are also an accrued income (asset) on the balance sheet for the delivery fiscal year, but not for the next fiscal year when cash is received.
Similarly, the salesperson who sold the product earned a commission at the moment of sale (or delivery). The company will recognize the commission as an expense in its current income statement, even though the salesperson will actually get paid at the end of the following week in the next accounting period. The commission is also an accrued liability on the balance sheet for the delivery period, but not for the next period when the commission (cash) is paid out to the salesperson.
The term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic/accounting characteristics.
Accrued revenue: revenue is recognized before cash is received.
Accrued expense: expense is recognized before cash is paid out.
The basis of accounting which is based on accruals is called accrual basis.
Accrued revenue (or accrued assets) is an asset, such as unpaid proceeds from a delivery of goods or services, when such income is earned and a related revenue item is recognized, while cash is to be received in a later period, when the amount is deducted from accrued revenues.
In the rental industry, there are specialized revenue accruals for rental income which crosses month end boundaries. These are normally utilized by rental companies who charge in arrears, based on an anniversary of a contract date.
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