What an accrual is
An accrued expense is a cost you have incurred but have not yet paid or been billed for. An accrued revenue is income you have earned but not yet invoiced. Both exist in the gap between doing the work and handling the paperwork.
If you ignore them, your reports mix periods. A month can look very profitable only because a bill has not arrived, and the next month will look poor when it does.
Common accrued expenses
Wages are the classic example. If your pay period ends on the 28th but the month ends on the 31st, employees have earned three days of pay that belong to this month. Other examples are utilities consumed but not billed, interest on a loan between payment dates, and contractor work completed but not invoiced.
To record it, debit the expense and credit an accrued liability. When the bill arrives or payment is made, you clear the liability instead of booking the expense again.
Accrued revenue
A consultant finishes a project on the last day of the month and sends the invoice next week. Under accrual accounting, the income belongs to the month the work was done. You debit an asset such as unbilled receivables and credit income.
When you send the invoice, you move the amount out of unbilled receivables into regular accounts receivable, with no further income. Many businesses skip this for small amounts and simply invoice by the month end.
Reversing entries make it easier
The usual method is to record the accrual on the last day of the month and set it to reverse on the first day of the next month. Then, when the real bill arrives and is entered normally, the books net out correctly with no manual cleanup.
Without reversal, you must remember to adjust the real bill against the accrual, which is easy to forget.
Do you need accruals?
If you use the cash method for books and taxes, you generally do not record accruals. Many small businesses do. If you use the accrual method, or need accrual reports for a lender, they are part of a proper close.
Judgment applies as to what is material. A tiny utility bill is not worth chasing, but a large contractor invoice is. Ask your CPA which method you should use for taxes, because that choice has rules and consequences.
A month-end accrual checklist
Before closing a month, ask four questions. Did employees work days not yet paid? Did any vendor finish work without sending an invoice? Did we deliver anything we have not billed? Is there interest or a recurring charge that posts after the month ends? Write each answer down with an estimated amount. This list takes ten minutes and is far more reliable than trying to remember.
Worked example with numbers
Payroll for the last four working days of March totals $6,000, but payday is April 3. On March 31, record debit wages expense $6,000 and credit accrued wages payable $6,000. March now carries its own labor cost. On April 3, when you run payroll, the payment clears the liability rather than hitting expense a second time.
On the revenue side, suppose you finish a $2,500 project on March 30 and send the invoice on April 4. Under the accrual method, record debit unbilled receivables $2,500 and credit service revenue $2,500 in March. When you invoice in April, the invoice replaces the unbilled receivable instead of creating revenue again. If you use reversing entries, set both accruals to reverse on April 1 so the real bill and invoice enter normally.
Mistakes that cost money
The classic error is accruing in March and then expensing the same payroll again in April, double counting the cost. Another is accruing round-number guesses with no support, which a lender or buyer will question. Some owners accrue everything including tiny items, wasting time; set a materiality level, such as ignoring anything under a few hundred dollars. Others forget that the tax return may use the cash method, so accruals can make books and return differ. Ask your preparer which method your return uses.
Check your work
After closing the month, run the balance sheet and read every accrued liability and unbilled receivable. Each should have a note saying what it is and when it will clear. Anything still sitting there two months later deserves a second look.
Common questions
Is an accrual the same as accounts payable?
Close, but different. Payables are for bills you have received. Accruals cover costs you know about but have no bill for yet.
Do I accrue sales tax?
Sales tax collected is usually recorded as a liability when the sale is recorded, not as a separate accrual. Check current rules with the state.
How do I estimate an accrual?
Use the strongest evidence available, such as hours worked times pay rate, or last month's usage. Then true up when the actual bill comes.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.