Glossary

Accrual accounting (interest)

Accrual accounting records interest in the period it relates to, matching cost to the time the money was borrowed, rather than when it is paid.

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Match to periodNot to cash

Interest as it arisesAccrued in the accounts

Definition

Accrual accounting requires interest to be recognised as an expense over the period the borrowing relates to. If a year’s interest is paid in arrears, part is accrued at the year end even though no cash has moved. It gives a truer picture of the cost of finance in each period than cash accounting.

In plain terms

It puts the interest cost in the month it belongs to, so your accounts show the real cost of running on borrowed money.

Why it matters for your company

Accruing interest correctly keeps your management accounts honest and your covenant tests accurate. See accrued vs cash interest.

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