Accrual


Accrual

Accrual is derived from the verb , which describes the gathering or clustering of things together over time, as atoms, or it describes a general increase in number, as in interest. It also holds specific meanings in the contexts of accounting and payroll.

Accruals in accounting

As applied to accounting, accrual describes the concept (known as accrual accounting) where a revenue or expense is not recorded (recognized) at the same moment in time as the related cash inflow / outflow.

For example, on December 30, 2001, a company delivers a product to a customer who will pay for that product 30 days later. Assuming the fiscal year ends on December 31, the company discloses that revenue in 2001 Income Statement even though it will get paid during the following fiscal year.

Similarly, the sales representative that sold the product is entitled to his or her commission at the moment of sale (or delivery). That means the company will record an expense (Salesperson’s Salaries and Commissions) in its 2001 Income Statement, even though the rep will actually get paid at the end of the following week, in January, 2002.

Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense or accrued revenue, items which may share a common name but have a different economic / accounting characteristic.

Accrued revenue is a receivable for other revenue. It is disclosed separately on the balance sheet primarily to allow investors to differentiate receivables from core operations from receivables from peripheral operations. An accrued expense, on the other hand, is a liability with an uncertain timing or amount but where the uncertainty is not significant enough to qualify it as a provision.

In the United States of America, this difference is best summarized by IAS 37 which states:

"11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:

"(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and

"(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.

"Accruals are often reported as part of trade and other payables, whereas provisions are reported separately."

To add to the confusion, some legalistic accounting systems take a simplistic view of “’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has not been formally invoiced. This is primarily due to tax considerations, since the act of issuing an invoice creates, in some countries, taxable revenue, even if the customer does not ultimately pay and the related receivable becomes uncollectible.

Accruals in payroll

In payroll, a common benefit that an employer will provide for employees is a vacation or sick accrual. This means that as time passes, an employee accumulates additional sick or vacation time and this time is placed into a bank. Once the time is accumulated, the employer or the employer's payroll provider will track the amount of time used for sick or vacation.

Length of Service

For most employers, a time-off policy is published and followed with regard to benefit accruals. These guidelines ensure that all employees are treated fairly with regard to the distribution and use of sick and vacation time.

Within these guidelines, the rate at which the employee will accumulate the vacation or sick time is often determined by length of service (the amount of time the employee has worked for the employers).

Trial Period

In many cases, these guidelines indicate there is a trial period (usually 30 to 90 days) where no time is awarded to the employee. This does not prevent an employee from calling in sick immediately after being hired, but it does mean that they will not get paid for this time off. However it does prevent an employee for example, scheduling a vacation for the second week of work. After this trial period, the award of time may begin or it may be retroactive, back to the date of hire.

Rollover/Carry Over

Some accrual policies have the ability to carry over or roll over some or all unused time that has been accrued into the next year. If the accrual policy does not have any type of rollover, any accrued time that is in the bank is usually lost at the end of the employer's calendar year.

See also

* Cash-basis accounting

References

* [http://blog-pfm.imf.org/pfmblog/2007/10/transition-to-a.html Transition to Accrual Accounting -- IMF Technical Guidance Note]

External links

* [http://blog-pfm.imf.org/pfmblog/2007/10/transitioning-t.html Transitioning to accrual -- IFAC resource, comments from Bill Dorotinsky - IMF/FAD]
* [http://blog-pfm.imf.org/pfmblog/2007/11/new-danish-accr.html New Danish Accrual Budgeting System, article from Marc Robinson - IMF/FAD]


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Look at other dictionaries:

  • accrual — ac‧cru‧al [əˈkruːəl] noun [countable] an increase in an amount of money, usually over a period of time: • The airline is asking employees to allow a one year freeze on pension accruals. • the accrual of $21 million in interest * * * accrual UK US …   Financial and business terms

  • accrual — ac·cru·al /ə krü əl/ n 1: the action or process of accruing claim must be brought within two years of the date of accrual 2 a: something that accrues; esp: an amount of money that periodically accumulates for a specific purpose (as payment of… …   Law dictionary

  • Accrual — Ac*cru al ([a^]k*kr[udd] al), n. Accrument. [R.] [1913 Webster] …   The Collaborative International Dictionary of English

  • accrual — (n.) 1782, from ACCRUE (Cf. accrue) + AL (Cf. al) (2) …   Etymology dictionary

  • accrual — [n] growth accumulation, amassing, amassment, buildup, increase; concepts 432,780 …   New thesaurus

  • accrual — [ə kro͞o′məntə kro͞o′əl] n. 1. the act or process of accruing 2. the amount that accrues: Also accruement [ə kro͞o′mənt] …   English World dictionary

  • accrual — [[t]əkru͟ːəl[/t]] accruals N COUNT: usu sing, oft N n In finance, the accrual of something such as interest or investments is the adding together of interest or different investments over a period of time. [TECHNICAL] ...the accrual of funds used …   English dictionary

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  • accrual — accrued charge; accrued expense; accrued liability An estimate in the accounts of a business of a liability that is not supported by an invoice or a request for payment at the time the accounts are prepared. An accrual is a current liability on… …   Big dictionary of business and management

  • accrual — /ə kru:əl/ noun 1. the act of noting financial transactions when they take place, and not when payment is made 2. a gradual increase by addition ♦ accrual of interest the automatic addition of interest to capital …   Dictionary of banking and finance


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