Jargon Busting – Accruals

Ever wondered what all those financial terms your accountant uses but too afraid to ask?  In this series we aim to demystify accounting jargon by explaining words and phrases in simple terms for anyone to understand.

This week we’re looking at accruals.

What is an accrual?

An accrual is basically money that’s been earned or spent but hasn’t hit your bank account yet.  It’s used to help keep score in business.

It’s about recognising expenses and revenues when they happen, not just when the cash actually changes hands. Imagine you run a small bakery. You baked a mountain of cupcakes in December and delivered them to a local café. They loved your cupcakes, but here’s the twist – the café pays you in January.

In the cash world, you’d only count the money when it hits your palm in January. But with accrual accounting, you’d be a step ahead. You’d recognise the sale in December, the moment those cupcakes left your oven and hit the café’s counter, even if the cash only rolls in later.

Why bother with accruals?

Accruals give a truer picture of how well your business is doing. It’s not just about the money in your pocket today but understanding the full story of your financial adventure.

Let’s flip the coin and look at expenses. Say you hired a graphic designer to craft a dazzling logo for your bakery. They send you the invoice in March, but the work was done in February. In the cash world, you’d only record the expense in March when you fork out the dough. But in the accrual universe, you’d mark it down in February, acknowledging the work done.

In a nutshell, accruals help you see the whole financial picture – the debts you’re owed and the debts you owe, even if the actual money moves a bit later.