What is an example of an accrual?

An example of an accrual is the accrual of interest expense. To understand what an accrual is, we need to understand how accrual accounting works. In accrual accounting, revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid.

In the case of interest expense accrual, let's say that a company has a loan with a 5% annual interest rate, and the interest is payable at the end of each quarter. At the end of the fiscal year, the company needs to prepare its financial statements, including the income statement and the balance sheet.

Since the interest is earned throughout the year, the company needs to accrue or recognize the interest expense for the periods when it was incurred but not yet paid. To do this, the company calculates the accrued interest expense based on the outstanding loan balance and the interest rate, and records it as an expense on the income statement.

This accrual entry increases the interest expense on the income statement for the period, reducing the net income. It also creates a corresponding liability on the balance sheet as an accrued expense, representing the amount owed but not yet paid.

The accrual of interest expense helps to match the expense with the revenue or benefit it represents, providing a more accurate reflection of the company's financial performance and financial position.