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Accrual Concept in Accounting: Definition & Examples

Published July 7, 2022 Updated January 20, 2026 by Sianna Shah

Accrual Concept in Accounting: Definition, Examples, and IFRS Treatment

The accrual concept in accounting requires recording Revenue when it is earned and expenses when they are incurred—regardless of when cash changes hands. This foundational principle ensures financial statements reflect actual economic activity rather than just cash movements.

Whether preparing for the ACCA Diploma in IFRS, studying for commerce exams, or working through accounting interview questions, understanding the accrual concept is essential for accurate financial reporting.

What Is the Accrual Concept in Accounting?

The accrual concept (also called accrual accounting or accrual basis of accounting) is an accounting principle where transactions are recorded when economic events occur, not when cash is received or paid.

Accrual Concept Definition

Under the accrual concept:

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 approach creates a more accurate picture of financial performance by matching revenues with the expenses that generated them.

The accrual concept works hand-in-hand with the double entry system, where every transaction is recorded as both a debit and credit to maintain balanced books."

Watch a 5 minute video explaining Accrual accounting

Core Characteristics of the Accrual Concept

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

Accrual Concept Meaning: Why It Matters

The accrual concept of accounting goes beyond simple bookkeeping—it ensures that financial statements reflect economic reality. Without accrual accounting, businesses could manipulate reported profits by strategically timing cash payments.

Example of Accrual Concept in Accounting

Scenario: A consulting firm completes a 50,000 project in December. The client pays in February.

Under accrual concept (December):

Revenue recognised: 50,000
Accounts receivable created: 50,000

When cash received (February):

Cash increases: 50,000
Accounts receivable decreases: 50,000

The Revenue appears in December's income statement—when the work was performed—providing accurate profit measurement for that period.

Accrual Basis of Accounting vs Cash Basis

Understanding the difference between accrual and cash basis accounting is crucial for choosing the correct method and interpreting financial statements.

Cash vs Accrual Accounting Comparison

Factor	Cash Basis	Accrual Basis
Revenue recognition	When cash received	When earned
Expense recognition	When cash 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	Small cash businesses	Most commercial entities

When to Use Cash Accounting

Cash accounting may suit:

Tiny businesses with simple transactions
Entities not requiring GAAP/IFRS compliance
Specific tax reporting purposes (jurisdiction-dependent)

When Accrual Accounting Is Required

Accrual accounting is mandatory for:

Companies reporting under IFRS
Entities following US GAAP
Publicly traded companies
Businesses seeking external financing or an audit

Accrual Concept Under IFRS

IFRS 18 Presentation of Financial Statements requires all financial statements (except cash flow statements) to be prepared using the accrual basis of accounting.

IFRS Requirements for Accrual Accounting

The IFRS Conceptual Framework states that accrual accounting depicts transaction effects in the periods they occur, even when cash receipts and payments happen in different periods.

Typical disclosure in notes to accounts:

"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 Applying Accrual Concepts

StandardApplication

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

Examples of Accrual Concept in Accounting

Understanding practical applications helps master the accrual concept.

1. Accrued Revenue (Revenue Earned, Cash Not Received)

A law firm provides 10,000 services in March—invoice sent in April, payment received in May.

March journal entry:

Account	Debit	Credit
Accounts Receivable	10,000
Service Revenue		10,000

Revenue appears in March when earned, creating an asset under current assets.

2. Accrued Expenses (Expense Incurred, Cash Not Paid)

Employees earn 25,000 in wages during the last week of December. Payday is January 5th.

December journal entry:

Account	Debit	Credit
Wages Expense	25,000
Accrued Wages Payable		25,000

The expense is recorded in December when incurred, creating a liability under current liabilities.

3. Deferred Revenue (Cash Received, Revenue Not Earned)

A software company receives 24,000 for a one-year subscription on January 1st.

January 1st (cash received):

Account	Debit	Credit
Cash	24,000
Deferred Revenue		24,000

Each month (Revenue recognised):

Account	Debit	Credit
Deferred Revenue	2,000
Subscription Revenue		2,000

4. Prepaid Expenses (Cash Paid, Expense Not Incurred)

A company pays 6,000 in advance for six months of rent on January 1st.

January 1st (cash paid):

Account	Debit	Credit
Prepaid Rent	6,000
Cash		6,000

Each month:

Account	Debit	Credit
Rent Expense	1,000
Prepaid Rent		1,000

Common Accruals in Business

Most businesses encounter these regular accrual adjustments:

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, not yet paid	Current liability
Accrued interest	Interest expense incurred, not yet paid	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

Accrual Accounting Under US GAAP

US GAAP requires accrual basis accounting for financial statements prepared in accordance with Generally Accepted Accounting Principles. The Financial Accounting Standards Board (FASB) establishes the authoritative guidance through the Accounting Standards Codification (ASC).

US GAAP Accrual Requirements

Under US GAAP, the accrual basis is mandated through several foundational concepts:

ASC Topic	Accrual Application
ASC 606	Revenue from Contracts with Customers—recognise revenue when performance obligations are satisfied
ASC 842	Leases—recognise lease expense on straight-line basis over lease term
ASC 710	Compensation—accrue employee compensation when services rendered
ASC 450	Contingencies—accrue loss contingencies when probable and estimable
ASC 740	Income Taxes—accrue tax expense based on taxable income, not cash paid

Key Differences: US GAAP vs IFRS Accrual Treatment

While both frameworks require accrual accounting, specific applications differ:

Area	US GAAP	IFRS
Revenue recognition	ASC 606 (five-step model)	IFRS 15 (identical framework)
Lease accounting	ASC 842—finance vs operating distinction affects balance sheet	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
Revaluation of assets	Not permitted	Permitted under revaluation model

Accrual Accounting for US Tax vs GAAP Reporting

US companies may use different accounting methods for tax and financial reporting purposes:

Tax Reporting Options:

Cash method permitted for small businesses (average annual gross receipts ≤ $29 million for 2024-2025)
The accrual method is required for most C corporations and businesses with inventory
Hybrid methods are allowed in certain circumstances

GAAP Reporting:

Accrual basis required for all entities issuing GAAP-compliant financial statements
SEC registrants must follow full accrual accounting under US GAAP
Private companies may elect specific simplified alternatives, but still use the accrual basis

Common US GAAP Accrual Entries

1. Revenue Accrual (ASC 606):

Account	Debit	Credit
Accounts Receivable	XXX
Revenue		XXX

Recorded when the performance obligation satisfied, regardless of billing

2. Compensation Accrual (ASC 710):

Account	Debit	Credit
Compensation Expense	XXX
Accrued Compensation		XXX

Recorded when employee services rendered, not when paid

3. Loss Contingency Accrual (ASC 450):

Account	Debit	Credit
Loss from Contingency	XXX
Contingent Liability		XXX

Recorded when loss is probable and amount is reasonably estimable

Accrual Concept and Matching Concept

The accrual concept and matching concept work together to ensure accurate financial reporting.

The Matching Principle Explained

The matching principle requires expenses to be recorded in the same period as the revenues they helped generate. This prevents distorted profit figures from timing mismatches.

Example:

A retailer purchases inventory in November (10,000), sells it in December (15,000), and receives payment 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 revenue and related costs appear in December, providing an accurate gross profit measurement.

For deeper analysis techniques, see our financial statement analysis guide.

Benefits of the Accrual Concept

1. More Accurate Financial Picture

Accrual accounting reflects economic substance, not just cash movements—essential for performance evaluation and investment decisions.

2. Better Comparability

Standardised accrual accounting enables meaningful comparison across companies and periods.

3. Compliance with Standards

IFRS and US GAAP require accrual accounting for most entities.

4. Supports Complex Transactions

Modern business involves credit sales, multi-period contracts, and long-lived assets—all of which are handled appropriately under accrual accounting.

Disadvantages of Accrual Accounting

1. Greater Complexity

Requires sophisticated bookkeeping systems and professional judgement for estimates.

2. Cash Flow Disconnect

Profitable companies can face cash shortages if accrued Revenue remains uncollected. Always analyse both the income statement and cash flow statement.

3. Estimation Uncertainty

Accruals, such as bad-debt provisions, involve estimates that may prove incorrect.

4. Potential for Manipulation

Revenue recognition timing creates opportunities for earnings management without proper controls.

Where Accruals Appear on Financial Statements

Balance Sheet

Current Assets:

Accounts receivable (accrued Revenue)
Prepaid expenses (deferred charges)

Current Liabilities:

Accounts payable
Accrued wages, interest, taxes
Deferred Revenue (unearned income)

Income Statement

Revenue recognised when earned
Expenses recognised when incurred
Depreciation and amortisation

Frequently Asked Questions

What is accrual concept in accounting?

The accrual concept requires recording Revenue when earned and expenses when incurred, regardless of when cash is received or paid. It ensures financial statements reflect actual economic activity.

What is the difference between accrual and cash accounting?

Cash accounting records transactions only when cash changes hands. Accrual accounting records transactions when economic events occur, even if cash moves later.

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

Accrual basis records transactions when they occur economically. Example: A company delivers goods worth 5,000 in March but receives payment in April. Under accrual basis, Revenue is recorded in March when goods were delivered.

Why is accrual concept important?

The accrual concept provides accurate profit measurement by matching revenues with related expenses in the same period. It's required under IFRS and GAAP for reliable 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 cash flow statements) to be prepared on an accrual basis.

Learn More with Eduyush

Master the accrual concept and other foundational accounting principles through Eduyush's globally recognised programmes:

ACCA Diploma in IFRS – Comprehensive IFRS training including accrual-based reporting
CPA Course – Adaptive learning platform of Surgent

For official technical guidance on accrual accounting and IAS 1 requirements, refer to ACCA's resources at accaglobal.com.

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