Accruals are accounting adjustments that record expenses or income in the period they occur, not when cash changes hands. A business posts an accrued expense when it receives goods or services before the supplier invoice arrives. It posts accrued income when it delivers goods or services before billing the customer.
The accruals concept is one of the fundamental principles of UK accounting. Under the accrual basis, a company matches revenue with the costs of generating that revenue in the same accounting period. This matching principle produces a more accurate financial picture than tracking cash in and out alone.
How Do Accruals Work in UK Accounting?
Accruals work by adjusting the accounts at the period-end to reflect transactions that have occurred but not yet been recorded through normal bookkeeping. A business identifies accrued expenses and accrued income at the year-end (or month-end for management accounts), then posts journal entries to recognise them.
Accrued expenses arise when a business consumes a service or receives goods before the invoice arrives. A company receives an electricity bill covering January to March after its 31 March year-end. The accountant accrues the estimated cost in March so the accounts reflect the true expense for the year.
Accrued income arises when a business delivers a service before invoicing. A consultancy completes a project in March but does not issue the invoice until April. The accountant accrues the income in March to match it with the period the work was performed.
Both types of accrual reverse in the following accounting period. This reversal prevents the actual invoice or receipt from being double-counted.
Why Do Accruals Matter for Your UK Business?
Accruals matter because they determine the accuracy and compliance of your statutory accounts. UK companies registered with Companies House must prepare accounts under either UK GAAP (FRS 102) or IFRS. Both frameworks require accrual accounting for most entities.
Five specific reasons explain why accruals matter:
- Statutory compliance. The Companies Act 2006 requires accounts to show a true and fair view. Accruals ensure expenses and income appear in the correct period.
- Corporation Tax accuracy. HMRC requires company accounts to follow accepted accounting practice. Inaccurate accruals produce incorrect taxable profits and potential penalties.
- Management decision-making. Accrual-based management accounts show real profitability. Cash-based accounts can mask overspending or delayed revenue.
- Investor and lender confidence. Banks and investors review accrual-based accounts to assess financial health. Missing accruals understate liabilities and misrepresent the business position.
- Audit readiness. Companies exceeding the audit threshold (currently £10.2 million turnover for small company exemption) face external audit. Auditors test accruals as a high-risk area.
What Are the Key Rules and Requirements for Accruals?
The key rules for accruals come from UK GAAP, IFRS, and the Companies Act 2006. Four core requirements apply to most UK limited companies.
Requirement 1: Match revenue and expenses. FRS 102 Section 10 requires revenue recognition when goods or services are delivered. The matching concept requires related costs to appear in the same period. If a consulting firm delivers work in March, the revenue and associated costs both appear in March accounts.
Requirement 2: Accrue at the reporting date. A business must identify and record accruals at the balance sheet date. This applies to annual accounts and any monthly management accounts. The accountant reviews purchase orders, delivery notes, and contracts to identify unbilled costs.
Requirement 3: Reverse in the following period. Accruals are temporary adjustments. Each accrual posts with a reversal date at the start of the next accounting period. This prevents double-counting when the actual invoice arrives and is processed.
Requirement 4: Document and evidence. HMRC may request evidence of accruals during a compliance check. Businesses should retain supporting documentation (emails, contracts, delivery notes, remittance advices) for at least six years.
The table below defines the three most common accrual types UK small businesses encounter, with definitions, examples, and the journal entries used to post them.
| Accrual Type | Definition | Example | Journal Entry |
|---|---|---|---|
| Accrued expense | Cost incurred but not yet invoiced | Utilities, professional fees, rent | Debit expense, Credit accruals |
| Accrued income | Revenue earned but not yet invoiced | Completed work unbilled at year-end | Debit accrued income, Credit revenue |
| Accrued holiday pay | Staff leave earned but not taken | Holiday entitlement accrued at year-end | Debit wages, Credit accruals |
Each type follows the same principle: record the economic event in the period it occurs, not when payment or receipt takes place.
What Common Questions Do Businesses Ask About Accruals?
What Is the Difference Between Accruals and Prepayments?
Accruals and prepayments are opposite adjustments. Accruals recognise costs or income before the invoice is processed; prepayments defer costs or income that have been invoiced but relate to a future period. A business accrues a £5,000 utility bill for March that arrives in April. The same business prepays £12,000 of annual insurance in January and recognises £1,000 per month.
Do Small Businesses Need to Use Accrual Accounting?
Limited companies must use accrual accounting for statutory accounts filed with Companies House. Sole traders and partnerships earning below £150,000 per year can use the cash basis for HMRC self-assessment. Companies House filings always require the accrual basis regardless of size.
How Do Accruals Affect Corporation Tax?
Accruals affect Corporation Tax by adjusting the profit figure. Accrued expenses reduce taxable profit in the current period. Accrued income increases taxable profit. HMRC accepts properly supported accruals as deductible expenses. Disallowable accruals, such as provisions for future losses, are added back in the tax computation.
How Can an Accountant Help with Accruals?
An accountant manages accruals by reviewing the ledger, identifying period-end adjustments, posting journals, and ensuring compliance with UK GAAP or IFRS. For businesses without an in-house finance team, an external accountant performs this work at the year-end and, where requested, at each month-end.
Aqua Accounting operates as an ICAEW Registered Member Firm with over 13 years of experience serving North East businesses from Newcastle upon Tyne. The team manages accruals as part of comprehensive Bookkeeping Services, ensuring management accounts reflect real performance.
For statutory compliance, the firm prepares Company Accounts that meet Companies House and HMRC requirements. Accruals form a critical part of this process. Missed or incorrect accruals trigger query letters from both bodies.
Accruals also affect Tax Returns and Taxation. The team ensures deductible accruals appear in the correct period to reduce Corporation Tax liability without overstating deductions. For strategic guidance on accounting method selection, Business Accounting Advisory services provide forward-looking analysis.
Frequently Asked Questions
What Are Accruals in Simple Terms?
Accruals are accounting entries that record expenses or income in the period they occur, not when the money is paid or received. If you receive a service in March but pay for it in April, the cost is accrued in March. Learn more through our Bookkeeping Services.
What Is a Real Example of an Accrual?
A business uses electricity throughout March. The supplier issues the bill in mid-April for £3,200. The accountant accrues £3,200 in March accounts so the expense appears in the correct period. See how this fits into the wider picture with our Company Accounts service.
Are Accruals the Same as Provisions?
No. Accruals relate to costs where the amount is known or can be reliably estimated; provisions relate to liabilities where the amount or timing is uncertain. An accrued utilities bill is an accrual. A provision for a pending lawsuit is a provision. Both appear under current liabilities on the balance sheet.
How Often Should Accruals Be Posted?
Accruals should be posted at every reporting period. For management accounts, this means monthly. For statutory accounts, this means at the financial year-end. Discuss your reporting cycle with our Tax Returns and Taxation team.
What Happens if a Business Forgets to Post an Accrual?
Forgetting to post an accrual understates expenses and overstates profit. This leads to an inaccurate Corporation Tax return and potentially overpaid tax. HMRC can charge interest and penalties for incorrect returns. File a corrected return if the error is identified later. Our Business Accounting Advisory team can assist.
Aqua Accounting | ICAEW Chartered Accountants | Newcastle upon Tyne Over 13 years serving North East businesses
Disclaimer:
The information provided in this blog is for general informational purposes only and does not constitute professional advice. While every effort is made to ensure accuracy, Aqua Accounting accepts no responsibility for any actions taken based on this content. You should seek professional advice tailored to your individual circumstances.
Omar Ahmed is an ICAEW Chartered Accountant and the Director of Aqua Accounting, a UK-based accountancy practice providing expert accounting and tax services to individuals, sole traders, and small to medium-sized businesses. As a trusted accountant in Newcastle, he offers expertise in annual accounts, self-assessment tax returns, company accounts, VAT, payroll, bookkeeping, and company formation.
With a strong focus on delivering clear and practical financial advice, Omar helps clients stay compliant while improving their understanding of their finances. Through Aqua Accounting, he works closely with business owners to simplify accounting processes, meet tax obligations, and support informed financial decision-making.