Accrue

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Origin

Middle English acreuen, probably from Anglo-French acrue increase, from acreistre to increase, from Latin accrescere, from ad- + crescere to grow

Definitions

  • 1: to come into existence as a legally enforceable claim

2a : to come about as a natural growth, increase, or advantage <the wisdom that accrues with age>

b : to come as a direct result of some state or action <rewards due to the feminine will accrue to me — Germaine Greer>
  • 3: to accumulate or be added periodically <interest accrues on a daily basis>

Description

Accrual (accumulation) of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.

For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a revenue in its current income statement still for the fiscal year of the delivery, even though it will get paid in cash during the following accounting period. The proceeds are also an accrued income (asset) on the balance sheet for the delivery fiscal year, but not for the next fiscal year when cash is received.

Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as an expense in its current income statement, even though the salesperson will actually get paid at the end of the following week in the next accounting period. The commission is also an accrued expense (liability) on the balance sheet for the delivery period, but not for the next period the commission (cash) is paid out to the salesperson.[1]