What is an Accrual?

An accrual is an expense that has been recognized in the current period for which a supplier invoice has not yet been received, or revenue that has not yet been billed. When an accrual is created, it is typically with the intent of recording an expense on the income statement. What is the impact of such an accrual on the balance sheet, where assets, liabilities, and equity items are located?

Accruals Recorded as Current Liabilities

If an accrual is recorded for an expense, you are debiting the expense account and crediting an accrued liability account (which appears in the balance sheet). Since an accrued expense is usually only for a very limited period of time (such as to record an expense for a supplier invoice that will probably arrive next month), this liability is classified as a current liability. Therefore, when you accrue an expense, it appears in the current liabilities portion of the balance sheet. For example, an accrued expense for unpaid wages would also be recorded as a current liability for unpaid compensation.

Accruals Recorded as Long-Term Liabilities

It is possible (but not likely) that an accrued expense might appear in the balance sheet under the long-term liabilities classification, but only if you do not plan to settle the liability for more than a year. For example, you might accrue an expense for a possible payout for a lawsuit that will not be settled for more than a year.

Accruals Recorded as Current Assets

If you record an accrual for revenue that you have not yet billed, then you are crediting the revenue account and debiting an unbilled revenue account. The unbilled revenue account should appear in the current assets portion of the balance sheet. Thus, the offsets to accruals in the income statement can appear as either assets or liabilities in the balance sheet.

Presentation of Accruals in the Balance Sheet

Accruals tend to be relatively small, and so may be merged into other line items in the balance sheet. In the following exhibit, we note the presentation of accrued expenses as a separate line item in a balance sheet.