Accrue — this term has two definitions:
- To collect something during the time, usually related to the sphere of finance and accounting (income, expenses, salary).
- In accrual accounting, collection of income or expenditure over time (synonym accrual).
When something accrues, it means it should be repaid or obtained after a while. An accrual is an adjustment utilized to track the funds that have been earned but still not received. Accruals include future tax liability, future interest expenses, accounts receivable, accounts payable, and goodwill.
Accrued expenses and Accrued revenues
Accrued expenses and revenues are related to the accrual method of accounting. This method implies the fixation of funds that have been earned regardless of the date of receipt. The two elements of this method are accrued expenses and accrued revenues.
Accrued expenses — are the expenses that are fixed before the payout. They will be repaid in another accounting period. Accrued expenses are divided into two types:
- Salaries payable — are the remunerations earned by the labor force that should be paid out in the next accounting period. They form during several stages. First, the accountant creates the timesheet for recording working time. Based on this timesheet, the accountant calculates accrual to all employees of all departments. In this way, they create accounting entries. When the salary is paid, the debt is considered discharged.
- Interest payable — is an accumulated interest that is still not paid out. This item of expenditure includes the interests of loans attracted by the organization, commercial loans received by transferring an advance, preliminary payment, deposits, discounts for bonds, and bank bills.
Accrued revenues — are the revenues that are fixed in one accounting period, but the cash will be received in the next period. Accrued revenues are divided into two types:
- Interest revenue — is a profit received from the investment. In other words, it is compensation paid for the use of financial resources. The interest revenue depends on the interest rate and the mechanism of interest accrual. If the interest revenue is accrued each time, and it doesn’t increase the initial contribution, we are talking about simple interest. If the interest gets capitalized, this is a composite interest.
- Accounts receivable — are the owed funds that have to be paid out. These are the debts to the organization from legal entities or individuals. The competent accountant should know how to manage the accounts receivables: identify the bad and non-recoverable debts, timely remind the contractors to pay, evaluate labor costs for debt collection and check the solvency of the debtor.