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In accounting, accrued and accrual are often confused. While they are related, they serve different purposes in how expenses and income are reported.

In this article, we will explain "what is the difference between accrual and accrued," show you some examples of how they are used in corporate finance, and how SAP ºÚÁϹÙÍø can help you optimize your expense and financial record management.

What Is Accrued in Accounting?

Accrued refers to expenses or revenues that have been incurred but have not yet been recorded in the financial statements. These items represent obligations or debts that a company must recognize even if cash has not yet changed hands.

By recognizing these items, businesses can avoid underreporting liabilities or revenues, ensuring compliance with generally accepted accounting principles (GAAP).

Examples of Accrued Items

Accrued expenses are expenses that you have incurred but have yet to be paid. Examples include:

• Wages payable: Employees may have worked during a period but will receive payment in the following period.
• Utilities payable: Utilities consumed during a month but not yet billed by the provider.
• Interest payable: Interest accumulated on a loan but not yet paid.

Accrued revenues are revenues you have earned but not collected yet. Examples include:

• Consulting fees: Services rendered by a consultant for which payment is due in the next period.
• Rent: Rent earned but not yet collected from a tenant.

Accrued items impact your financial statements in several ways:

• Income statement: They ensure expenses and revenues are reported in the correct period.
• Balance sheet: Accrued items appear as liabilities (for expenses) or assets (for revenues), providing a complete picture of financial obligations and rights.
• Cash flow: While accrued items do not directly affect cash flow, they influence net income, which is used in cash flow calculations.

What Does Accrual Mean and How Is It Applied?

Accrual is the accounting method where money spent and money earned is recognized when they happen, regardless of when the cash transactions take place. This method contrasts with cash accounting, where transactions are only recorded when cash is exchanged.

The accrual method uses the matching principle to ensure revenues and associated expenses are recorded in the same period to provide a more accurate picture of profitability.

Examples of Accrual Transactions

Examples include:

• Recognizing Revenue: A company delivers goods in March but receives payment in April. Under accrual accounting, the revenue is recorded in March.
• Recognizing Expenses: A business uses electricity in December and receives the bill in January. The expense is recorded in December.

The accrual process impacts financial reporting on:

• Income statements: Revenues and expenses are matched to the appropriate periods, providing a more accurate representation of net income.
• Balance sheets: Accrual transactions result in receivables (assets) or payables (liabilities), reflecting the company¡¯s financial obligations and entitlements.
• Cash flow statements: Adjustments are made to reconcile net income with cash flows, ensuring cash activities are clear.

What Are the Differences Between Accrued and Accrual?

Accrued and accrual differ in their focus and scope. Accrued focuses on individual transactions, such as wages or utilities. Accrual is an overall accounting methodology to recognize transactions when they occur.

Accrued identifies and records future revenue or expenses that have been earned or spent but not yet paid. Accrual ensures that all financial activities align with the matching principle.

Why Businesses Use Both Concepts

Both accrued and accrual are important concepts for accurate financial reporting. Accrued items ensure individual obligations and rights are recorded, while accrual accounting ensures all transactions are aligned with their respective periods.

Together, they provide:

• Accuracy: Reflecting true financial performance
• Compliance: Meeting regulatory requirements
• Transparency: Offering stakeholders a clear view of financial health

In short, these methods help companies to measure what they owe and what customers owe them. This helps in planning ¡ª making sure you have enough cash to pay for bills that are coming due, and what revenue is coming your way in the future.

According to Generally Accepted Accounting Principles (GAAP), the accrual method of accounting is preferred.

The Downside of Accruing Expenses and Revenue

One of the disadvantages of using this method is that it takes more work and increases the odds of making mistakes ¡ª especially if you don¡¯t have an automated system for categorizing and managing your finances.

You also have to divide accrued expenses into operating and non-operating expenses.

Operating expenses are needed to run the business day to day, are fairly predictable, and occur on a regular basis. For example, employee payroll or supply purchases. Non-operating expenses are not directly related to core operations, such as interest payments on a loan or service delivery expenses.

In cash-basis accounting, you¡¯re recording everything as money goes out or comes in regardless of when it was earned or spent. This is a much more straightforward way of recording your finances. However, it doesn¡¯t give you the true picture of what¡¯s going on from month to month.

With the accrual method, you¡¯re doubling the workload. When an expense occurs but has not yet been paid, you have to:

• Enter a debit against your expenses.
• Enter a credit against the accrued liability.

This increases the amount on income statements as owed, but also credits the liability on your balance sheet.

Once the payment is made, you reverse the process:

• Debit the accrued liability.
• Credit your cash account to show the amount as paid.

However, recording transactions as accrued and using the accrual method provides the most accurate accounting of your financial condition.

How Can SAP ºÚÁϹÙÍø Help Manage Accrued and Accrual?

SAP ºÚÁϹÙÍø solutions automate and manage travel and expense (T&E) and invoices. By integrating your financial systems, you can streamline data collection. SAP ºÚÁϹÙÍø solutions enable you to capture spend digitally to ensure accuracy. The system automatically categorizes expenses and populates expense reports.

You get near real-time insight into your outstanding obligations, which helps you manage your spending.

When it¡¯s time to close the books for the month, your process is simplified ¡ª helping reduce the potential for errors in accrued expenses.

For more insights on improving your financial management, visit