Accrual is derived from the verb accrue, which describes the gathering or clustering of things together over time, as atoms, or it describes a general increase in number, as in interest. It also holds specific meanings in the contexts of accounting and payroll.
Accruals in accounting
As applied to accounting, accrual describes the concept (known as accrual accounting) where a revenue or expense is not recorded (recognized) at the same moment in time as the related cash inflow / outflow.
For example, on December 30, 2001, a company delivers a product to a customer who will pay for that product 30 days later. Assuming the fiscal year ends on December 31, the company discloses that revenue in 2001 Income Statement even though it will get paid during the following fiscal year.
Similarly, the sales representative that sold the product is entitled to his or her commission at the moment of sale (or delivery). That means the company will record an expense (Salesperson’s Salaries and Commissions) in its 2001 Income Statement, even though the rep will actually get paid at the end of the following week, in January, 2002.
Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense or accrued revenue, items which may share a common name but have a different economic / accounting characteristic.
Accrued revenue is a receivable for other revenue. It is disclosed separately on the balance sheet primarily to allow investors to differentiate receivables from core operations from receivables from peripheral operations.
An accrued expense, on the other hand, is a liability with an uncertain timing or amount but where the uncertainty is not significant enough to qualify it as a provision.
In the United States of America, this difference is best summarized by IAS 37 which states:
"11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
"(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
"(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
"Accruals are often reported as part of trade and other payables, whereas provisions are reported separately."
To add to the confusion, some legalistic accounting systems take a simplistic view of “’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has not been formally invoiced. This is primarily due to tax considerations, since the act of issuing an invoice creates, in some countries, taxable revenue, even if the customer does not ultimately pay and the related receivable becomes uncollectible.
Accrued interest
(Redirected from
Accrued income)
In finance, accrued interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals.
Formula
The primary formula for calculating the interest accrued in a given period is:
where IA is the accrued interest, T is the fraction of the year, P is the principal, and R is the annualized interest rate.
T is calculated as follows:
where DP is the number of days in the period, and DY is the number of days in the year.
A compounding instrument adds the previously accrued interest to the principal each period.
The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.
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