Accruals are accounting entries that recognise expenses or revenues in the period they are incurred or earned, regardless of when cash changes hands. Under accrual accounting, a cost is recorded when the service is received or obligation arises, not when the invoice is paid. Accruals ensure financial statements reflect economic reality.
In Depth
Accrual accounting is the foundation of modern financial reporting and a concept FP&A teams work with daily. The core principle is matching — expenses should be recorded in the same period as the revenue they help generate, regardless of cash timing.
Common accruals include: salary accruals (recognising payroll costs for days worked but not yet paid), utility accruals (estimating the bill for services consumed), professional fee accruals (recognising work done by advisers before invoicing), bonus accruals (spreading annual bonus costs across months), and revenue accruals (recognising earned but not yet invoiced revenue).
Accruals appear on the balance sheet as current liabilities (expense accruals) or current assets (revenue accruals). When the cash transaction eventually occurs, the accrual is reversed, and the invoice is posted against the actual cost.
For FP&A teams, accruals are essential for producing accurate monthly management accounts. Without accruing for known costs, monthly P&Ls would swing wildly — a month with a large quarterly invoice would appear expensive, while the preceding months would appear artificially cheap.
For UK businesses, common accruals include PAYE/NI for the partial month at period-end, annual insurance premiums spread monthly, rent-free periods amortised over the lease term, and holiday pay accruals (a legal requirement under UK employment law).
Real-World Example
A UK company receives its annual insurance premium invoice of £60K in January. Rather than recognising the full cost in January, the FP&A team accrues £5K per month across the year. This ensures each month's P&L reflects a fair share of the insurance cost. On the balance sheet, a prepayment of £55K appears in January (11 months remaining), reducing by £5K each month.
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