What Does Accrued Mean in Accounting and Finance?

“Accrued” refers to financial events where value has been exchanged, but the associated cash payment or receipt has not yet taken place. This concept ensures that a company’s financial records reflect its true economic activities, regardless of when money changes hands.

Accrued Expenses

Accrued expenses represent costs a business has incurred for goods or services received, even though the payment has not yet been made. These obligations are recorded to accurately reflect their true costs of operation within a specific accounting period, aligning with generally accepted accounting principles (GAAP). This practice ensures that financial statements provide a comprehensive picture of a company’s liabilities.

Employee salaries and wages are common examples. Employees earn their pay continuously, but companies typically process payroll on a bi-weekly or monthly basis. At the end of an accounting period, any wages earned by employees but not yet paid would be recorded as an accrued expense.

Utility services like electricity or water are consumed throughout a month, but the bill often arrives and is paid in the subsequent month. The cost of the services used in the current period, even if unbilled, becomes an accrued expense. Interest owed on a loan also accrues over time, even if the payment is only due quarterly or annually. These accrued expenses are recognized as liabilities on the balance sheet.

Accrued Revenues

Accrued revenues are the opposite of accrued expenses; they represent income a business has earned by providing goods or services, but for which the cash has not yet been received. This means the company has fulfilled its part of an agreement, but the customer has not yet paid. Recognizing accrued revenue allows a business to accurately report all income generated during a specific period, even if the payment arrives later.

For example, a consulting firm might complete a project for a client in December but not issue the invoice or receive payment until January. The revenue for that completed project is considered earned in December and would be recorded as an accrued revenue. Interest earned on an investment also accrues over time.

Even if the interest payment is only received semi-annually, the portion earned by the end of an accounting period is recognized as accrued revenue. Rent earned from a tenant but not yet collected is another common example. These amounts are considered assets on the balance sheet because they represent future cash inflows that the company expects to receive.

The Concept of Accrual Accounting

The concept of “accrued” is a fundamental component of accrual accounting, which is the standard accounting method for most businesses in the United States. Accrual accounting operates on the principle that financial transactions should be recorded when they occur, not necessarily when cash changes hands. This method aims to match revenues with the expenses incurred to generate those revenues in the same accounting period. This “matching principle” provides a more accurate and comprehensive picture of a company’s financial performance over time.

By recognizing revenues when earned and expenses when incurred, accrual accounting offers stakeholders a clearer understanding of profitability and financial health than simply tracking cash inflows and outflows. It allows for a consistent representation of economic activity, linking the efforts (expenses) to the results (revenues). This method is required for many businesses, ensuring financial reporting adheres to established standards like GAAP.