What does an accrual in accounting represent?

An accrual in accounting represents an adjustment for revenues or expenses that have been incurred but not yet recorded in the financial statements. This concept is fundamental to the accrual basis of accounting, which recognizes economic events in the periods they occur, regardless of when cash transactions happen.

When a company provides a service or incurs an expense, it may not immediately receive or spend cash. However, these events still affect the company's financial position and performance and should therefore be reflected in the accounts. For example, if a company earns revenue in December but does not bill the client until January, the earnings must still be recorded in December to accurately reflect that month’s financial performance. Similarly, if an expense is incurred in one accounting period but paid in another, the expense must be recorded when it is incurred to match it with the revenues of the same period, adhering to the matching principle.

This approach ensures that financial statements provide a more accurate and realistic picture of a company’s financial health, allowing stakeholders to make more informed decisions.