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Accrual Concept in Accounting: Definition & Examples

Q: What is the accrual concept in accounting?

The accrual concept requires recording revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. It ensures financial statements reflect actual economic activity rather than cash movements.

Q: What is the difference between accruals and deferrals?

Accruals record revenue or expenses before the cash moves: accrued revenue (a receivable) and accrued expenses (a payable). Deferrals record cash that has already moved but is not yet earned or incurred: deferred revenue (a liability) and prepaid expenses (an asset).

Published July 7, 2022 Updated June 30, 2026 by Sianna Shah

Accounting basics

Accrual concept

The accrual concept is the backbone of modern financial reporting: it records revenue when it's earned and expenses when they're incurred — no matter when the cash actually moves. That timing shift is what lets financial statements show real economic performance instead of just the state of the bank account. This guide covers the definition, journal entries, the accruals-vs-deferrals matrix, and IFRS and US GAAP treatment.

Quick answer

The accrual concept (accrual basis of accounting) records transactions when the underlying economic event happens, not when cash changes hands. Revenue is recognised when earned (goods delivered or services performed) and expenses when incurred (benefits consumed).

It's built on the matching principle — expenses are reported in the same period as the revenue they helped generate — and it's required under both IFRS and US GAAP for most businesses. It works hand in hand with the double entry system, where every transaction is a matching debit and credit.

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

Feature	Description
Revenue timing	Recorded when earned, not when cash is received
Expense timing	Recorded when incurred, not when cash is paid
Creates receivables / payables	Transactions are recorded before cash moves
Required by IFRS / GAAP	Mandatory for most businesses
Supports the matching principle	Expenses are matched to related revenues

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.

Accrued revenue

Earned, but cash not yet received.

→ Creates an asset (receivable)

Accrued expense

Incurred, but cash not yet paid.

→ Creates a liability (payable)

Deferred (unearned) revenue

Cash received, but not yet earned.

→ Creates a liability

Prepaid expense

Cash paid, but not yet incurred.

→ Creates an asset

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.

Factor	Cash basis	Accrual basis
Revenue recognition	When cash is received	When earned
Expense recognition	When cash is paid	When incurred
Complexity	Simple	More complex
IFRS / GAAP compliance	Not permitted	Required
Balance-sheet accuracy	Less accurate	More accurate
Receivables / payables	Not recorded	Recorded
Best for	Tiny cash businesses	Most commercial entities

One transaction, two answers

A consulting firm finishes a ₹50,000 project in December; the client pays in February. Under the accrual basis, revenue of ₹50,000 is recognised in December (with a receivable), so December's profit reflects the work done. Under the cash basis, nothing is recorded until February — distorting both months. Accrual accounting matches the result to the effort.

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.

March entry	Debit	Credit
Accounts receivable	10,000
Service revenue		10,000

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.

December entry	Debit	Credit
Wages expense	25,000
Accrued wages payable		25,000

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.

1 January (cash received)	Debit	Credit
Cash	24,000
Deferred revenue		24,000

Each month (revenue earned)	Debit	Credit
Deferred revenue	2,000
Subscription revenue		2,000

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.

1 January (cash paid)	Debit	Credit
Prepaid rent	6,000
Cash		6,000

Each month	Debit	Credit
Rent expense	1,000
Prepaid rent		1,000

Common accruals in business

Type	Description	Balance-sheet impact
Accounts receivable	Revenue earned, cash not received	Current asset
Accounts payable	Goods/services received, cash not paid	Current liability
Accrued wages	Employee services rendered, unpaid	Current liability
Accrued interest	Interest incurred, unpaid	Current liability
Depreciation	Asset cost allocated over useful life	Contra-asset
Warranty provisions	Estimated future warranty costs	Liability
Provision for doubtful debts	Estimated uncollectable receivables	Contra-asset
Contingent assets	Possible assets from past events	Disclosed in notes

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.

Typical disclosure in the notes

"The financial statements have been prepared on an accrual basis and going concern basis under the historical cost convention, except for certain financial instruments measured at fair value."

Key IFRS standards that apply the accrual concept

Standard	Application
IFRS 18 (from 2027)	Requires the accrual basis for financial statements
IFRS 15	Revenue recognition when performance obligations are satisfied
IAS 19	Employee-benefit expenses when services are rendered
IAS 16	Depreciation spreading asset cost over useful life
IAS 37	Provisions recognised when an obligation exists

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).

ASC topic	Accrual application
ASC 606	Revenue from contracts — recognise when performance obligations are satisfied
ASC 842	Leases — recognise lease expense over the lease term
ASC 710	Compensation — accrue when services are rendered
ASC 450	Contingencies — accrue loss contingencies when probable and estimable
ASC 740	Income taxes — accrue tax on taxable income, not cash paid

US GAAP vs IFRS: where accrual treatment differs

Area	US GAAP	IFRS
Revenue recognition	ASC 606 (five-step model)	IFRS 15 (essentially identical)
Lease accounting	ASC 842 — finance vs operating split	IFRS 16 — most leases on balance sheet
Development costs	Generally expensed as incurred	Capitalised if criteria met (IAS 38)
Inventory costing	LIFO permitted	LIFO prohibited
Asset revaluation	Not permitted	Permitted under the revaluation model

Accrual vs cash for US tax

US companies can use different methods for tax and financial reporting. For tax, the cash method is available to smaller businesses whose average annual gross receipts stay under an inflation-adjusted threshold — $32 million for 2026 (Section 448(c)). The accrual method is required for most C corporations and businesses carrying inventory. GAAP financial statements always use the accrual basis.

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.

Month	Revenue	Cost of goods sold	Gross profit
November	0	0	0
December	15,000	10,000	5,000
January	0	0	0

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

Benefits	Drawbacks
More accurate picture of economic performance	Greater complexity; needs proper systems
Better comparability across companies and periods	Profit can diverge from cash — watch liquidity
Compliant with IFRS and US GAAP	Estimates (e.g. bad debts) may prove wrong
Handles credit sales, multi-period contracts, long-lived assets	Recognition timing can be manipulated without controls

Profit is not cash

A profitable company can still run short of cash if accrued revenue stays uncollected. That's exactly why you read the income statement and the statement of cash flows together — one shows performance, the other shows liquidity.

Where accruals appear on the financial statements

Statement	Where accruals show up
Balance sheet — current assets	Accounts receivable (accrued revenue), prepaid expenses
Balance sheet — current liabilities	Accounts payable, accrued wages/interest/taxes, deferred revenue
Income statement	Revenue when earned, expenses when incurred, depreciation and amortisation

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Frequently asked questions

What is the accrual concept in accounting?

The accrual concept requires recording revenue when it's earned and expenses when they're incurred, regardless of when cash is received or paid. It ensures financial statements reflect actual economic activity rather than cash movements.

What is the difference between accrual and cash accounting?

Cash accounting records transactions only when cash changes hands. Accrual accounting records them when the economic event occurs, even if the cash moves in a later period. Accrual is required under IFRS and US GAAP; cash basis is not permitted for GAAP-compliant statements.

What is the accrual basis of accounting, with an example?

The accrual basis records transactions when they occur economically. Example: a company delivers goods worth ₹5,000 in March but is paid in April. Under the accrual basis, revenue is recorded in March, when the goods were delivered.

What is the difference between accruals and deferrals?

Accruals record revenue or expenses before the cash moves — accrued revenue (a receivable) and accrued expenses (a payable). Deferrals record cash that has already moved but isn't yet earned or incurred — deferred revenue (a liability) and prepaid expenses (an asset).

Why is the accrual concept important?

It gives an accurate profit measure by matching revenues with the related expenses in the same period, and it's required under IFRS and US GAAP for reliable, comparable financial reporting.

What are typical examples of accruals?

Common accruals include accounts receivable, accounts payable, accrued wages, accrued interest, prepaid expenses, deferred revenue and depreciation.

Is accrual accounting required under IFRS?

Yes. IAS 1 requires financial statements (except the statement of cash flows) to be prepared on the accrual basis. From 1 January 2027, IFRS 18 replaces IAS 1 and keeps this requirement.

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.

About the author: This guide was written by Vijaya Swaminathan, CA — a chartered accountant with 25 years of experience, 15 of them specialising in IFRS training and implementation.

Keep learning

The double entry system

IFRS conceptual framework

The going concern concept

What is a financial statement?

Current assets

Current liabilities

Revenue recognition (IFRS 15)

Accounting interview questions

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Accrual Concept in Accounting: Definition & Examples