Accrual Concept in Accounting: Definition & Examples

What is the accrual concept in accounting?

The accrual concept — also called accrual accounting or the accrual basis — is the principle that transactions are recorded when economic events occur, not when cash is received or paid. Under it:

• Revenue is recognised when earned (goods delivered or services performed).
• Expenses are recognised when incurred (benefits consumed).
• The timing of cash is irrelevant for recognition purposes.

This creates a more accurate picture of financial performance by matching revenues with the expenses that generated them. Watch our 5-minute explainer, then work through the entries below.

Core characteristics

Accruals vs deferrals: the four cases

Every accrual adjustment is one of four types, depending on whether it's revenue or an expense, and whether the cash comes later or came first. This 2×2 is the mental model that makes the whole topic click.

Green = asset · Red = liability. Left column: cash comes later (true accruals). Right column: cash came first (deferrals).

Accrual vs cash basis of accounting

The cash basis records transactions only when money moves; the accrual basis records them when the economic event occurs. The difference drives how profit and position are reported.

Accrual concept examples with journal entries

1. Accrued revenue — earned, cash not received

A law firm provides ₹10,000 of services in March; the invoice is sent in April and paid in May. The revenue belongs to March.

Creates an asset under current assets.

2. Accrued expense — incurred, cash not paid

Employees earn ₹25,000 of wages in the last week of December; payday is 5 January. The expense belongs to December.

Creates a liability under current liabilities.

3. Deferred revenue — cash received, not yet earned

A software company receives ₹24,000 on 1 January for a one-year subscription. It's earned ₹2,000 a month, not all at once.

4. Prepaid expense — cash paid, not yet incurred

A company pays ₹6,000 on 1 January for six months of rent. It's consumed ₹1,000 a month.

Common accruals in business

The accrual concept under IFRS

Currently, IAS 1 Presentation of Financial Statements requires all financial statements — except the statement of cash flows — to be prepared on the accrual basis. From 1 January 2027, IAS 1 is replaced by IFRS 18 Presentation and Disclosure in Financial Statements, which carries this accrual requirement forward unchanged. The IFRS Conceptual Framework reinforces it: accrual accounting depicts the effects of transactions in the periods they occur, even when the cash flows land in different periods.

Key IFRS standards that apply the accrual concept

The accrual concept under US GAAP

US GAAP also mandates the accrual basis for GAAP-compliant financial statements, through the FASB's Accounting Standards Codification (ASC).

US GAAP vs IFRS: where accrual treatment differs

The accrual concept and the matching principle

The matching principle requires expenses to be recorded in the same period as the revenues they helped generate, so profit isn't distorted by timing.

Example: a retailer buys inventory for ₹10,000 in November, sells it for ₹15,000 in December, and is paid in January.

Both the revenue and its related cost land in December — giving an accurate gross-profit measure for the period the sale actually happened.

Benefits and drawbacks

Where accruals appear on the financial statements

Frequently asked questions

Conclusion

The accrual concept is what turns raw cash movements into a faithful record of economic performance. By recognising revenue when earned and expenses when incurred — and sorting every adjustment into accrued revenue, accrued expense, deferred revenue or prepaid expense — it produces statements that are accurate, comparable and standards-compliant. Get comfortable with the four cases and their journal entries, and the rest of financial reporting becomes far easier to follow.

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