Accrual

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Accrual (accumulation) of something is, in finance, the adding together of interest or different investments over a period of time, or the gathering or clustering of things, such as atoms (1 - the act or process of accruing; 2 - the amount that accrues). It holds specific meanings in accounting and payroll.

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Accruals in accounting

Accrual, in accounting, describes the accounting method known as accrual basis, whereby revenues and expenses are recognized when they are accrued, i.e. accumulated (earned or incurred), regardless when the actual cash is received or paid out.

E.g. on December 30, a company delivers a product to a customer who will pay for it 30 days later. Assuming the fiscal year ends on December 31, the company still recognizes that promise to be paid as a revenue its current income statement, even though it will get paid in cash during the following accounting period.

Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as an expense in its current income statement, even though s-/he will actually get paid at the end of the following week in the next accounting period.

Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic / accounting characteristics.

  • Accrued revenue: Revenue is recognized before cash is received.
  • Accrued expense: Expense is recognized before cash is paid out.

Accrued revenue (or accrued assets) is an asset, such as unpaid proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a latter period, when its amount is deducted from accrued revenues.

Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision. An example is an unpaid obligation to pay for goods or services received FROM a counterpart, while cash for them is to be paid out in a latter accounting period when its amount is deducted from accrued expenses.

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

Look up accrue, accrual in Wiktionary, the free dictionary.

References

External links

Retrieved from "http://en.wikipedia.org/wiki/Accrual"

More about Accrual: accrual basis, certificate of accrual on treasury securities, cash vs accrual, certificate of accrual on treasury securities cat, accrual basis accounting, cash or accrual, accrual definition, expense accrual, vacation accrual,

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