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What is an accrual?
An accrual is a bookkeeping entry that recognises income or expenditure in the accounting period to which it relates, rather than when the corresponding invoice is raised or cash is received. If your company uses electricity throughout March but the bill does not arrive until April, the March cost is accrued so that the profit-and-loss account for March reflects the true cost of operating during that period.
Accruals sit on the balance sheet as current liabilities (accrued expenses) or current assets (accrued income) until the underlying invoice or payment settles them. Most limited companies operating under UK GAAP (FRS 102) or IFRS are required to prepare accounts on an accruals basis rather than a cash basis.
Why accruals matter to directors
Because accruals shift the timing of expense recognition, the profit figure in management accounts can differ significantly from cash in the bank. A director reviewing monthly accounts needs to understand that a profitable month on paper may coincide with negative cash flow if large accrued costs are about to fall due.
Lenders and credit analysts scrutinise accrual entries when assessing creditworthiness. Unusually large or growing accruals relative to turnover can indicate deferred costs, contract disputes, or aggressive accounting — all of which affect how a business is viewed when seeking commercial finance.
Accruals versus prepayments
Accruals and prepayments are mirror concepts. A prepayment records a cost paid in advance of the period it relates to (reducing the current period charge); an accrual records a cost incurred but not yet invoiced or paid (increasing the current period charge). Both are reversed in the following period when the actual invoice or payment is processed.
Common examples in a trading business
- Accrued wages — payroll costs for the last week of a month where payment date falls in the next month
- Accrued interest — interest on a loan that has built up but is not yet invoiced by the lender
- Accrued professional fees — accountancy or legal costs where work is complete but the bill has not yet arrived
- Accrued rent — property costs relating to the period but invoiced quarterly in arrears
Frequently asked questions
Does a small company need to use accruals?
Most limited companies must prepare accounts on an accruals basis under FRS 102 or FRS 105. Micro-entities applying FRS 105 still use accruals for most items, though with simplified disclosures. A sole trader using cash-basis accounting for self-assessment is a different matter and outside the scope of limited company reporting.
Can accruals affect a company's ability to borrow?
Yes. Large accrued liabilities reduce net current assets and can tighten liquidity ratios. A lender assessing working capital will factor accruals into its view of true short-term obligations. Unexplained accrual movements may prompt additional due diligence questions.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.