Some examples of accruals
Some simple examples of when accrued income arise can be:
- A law firm that first delivers the service and receives payment after the service is delivered (the case is concluded) will accrue income.
- A construction company that first completes the building (which might take several years) and then receives the payment.
Examples of accrued liabilities will then be the clients of these companies who in their accounts will record accrued liabilities until they have made payment.
What is the benefit of using accruals in accounting?
The purpose of accounting is to give a fair understanding of a business’s income and expenses during a specific period of time. However, much of business in both business and consumer markets is done on credit, i.e. you first deliver the goods or the service, and then you receive the payment. The payment might come after only a few days, but it can also be deferred many months or even years, or the payment is done in installments.
With accruals, the accounting follows the business transaction (the exchange of goods and services) rather than the exchange of cash. This arguably gives a more accurate picture of how a company is doing, as the timing of cash payment can easily be manipulated.