Last editedApr 20222 min read
One of the central principles of accounting relates to when income or revenue is recognised – this should be declared when they are earned, rather than when a payment is actually made. This is a process known as accruals, and this income can be declared as accrued rather than actually paid or received.
So, in other words, an accrual is revenue that has been acquired during a period but for which no payment has yet been exchanged. This means that at the end of the accounting period, accruals have not been paid. However, they must be recorded in the accounts to generate an accurate picture of financial performance. Keep reading to find out more about invoice accrual and how to accrue an invoice.
What is invoice accrual?
As previously mentioned, accruals represent all revenue acquired during a period that has not yet been paid. This will still be declared in the business accounts, despite the fact that payment has not yet been received.
The invoice accrual process
A good way to understand the invoice accrual process is through an example. Say that you pay your energy bills on a quarterly basis, but you want to keep a monthly balance sheet for a more up-to-date view of your company’s finances. This is a prime example of when you need to know how to accrue an invoice.
In this situation, a monthly charge (calculated proportional to the quarterly charge) will be charged to the profit and loss account. When the invoice is actually received in the future (every quarter), the accrual will be reversed to offset this. This allows you to spread the cost of the bills across months, rather than facing a larger bill every quarter, which can have a negative impact on your business cash flow.
To help you with this, you can also download an invoice accrual template. Excel is a good way to do this, or you can also make use of various different types of accounting software that will streamline the process for you.
Types of invoice accrual
There are various different kinds of invoice accrual, but they mostly fall within two categories:
Expenses accruals are related to when products or services are received by a company but they have not yet made the payment for this. For example, this occurs for energy bills, for which the company pays after they have used the energy. Accounts receivable are examples of expenses accrual.
Revenue accruals are the opposite, meaning that the company has provided goods or services but has not yet received payment for them. For example, a construction company may work on a project and receive the payment for this incrementally as the work is completed. At some points, work has been completed but no payment has been received for this yet.
Benefits of accrual accounting
There are various different benefits to using accrual accounting, and most businesses choose to do this rather than declaring income and expenses when the payments are actually made.
Accrual accounting makes for more comprehensive and up-to-date financial statements. Even if a payment has not yet been made, it still has a future impact on your company’s finances. If you use accrual accounting, you can always see an accurate overview of how much your business owes and is owed, giving you a better idea of financial health.
On the other hand, it’s important to remember that accruals are often estimates. For example, it’s impossible to know exactly how much you will owe for an energy bill until you know your actual usage. For this reason, accruals can also cause problems with cash flow forecasting, and it’s important to take them with a pinch of salt.
We can help
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