Accruals are expenses for which invoices have not been received at the end of an accounting period.
These outstanding amounts are not strictly creditors because invoices have not been received. However, in order to for the accounts to be consistent with the accrual concept these costs need to be included on the P & L for the period.
Accruals and deferred income are often shown as a single balance sheet item.
Including the accrued expenses and excluding the deferred income in the P & L makes it necessary to show the total amounts accrued on the balance sheet in order to reconcile the accounts. Then in the next period:
- When accruals are invoiced they are moved from accruals to creditors.
- When the goods or services to which the deferred income relates are supplied, the revenue will be recognised, and the deferred income on the balance sheet reduced.
Accruals are a liability, so when accruals are moved to creditors there is no change in the total liabilities on the balance sheet.
Accruals, deferred income, and similar items are all differences between profit and cash flow that result from the application of the accruals principle. They arise because the change in the balance sheet needs to be consistent with the P & L, so when the application of the accruals principle has an impact on the P & L, it must have a matching effect on the balance sheet.