A March project paid in May
Picture a consultancy that finishes a project in March and is paid in May. Viewed through cash alone, March shows the salaries and no income while May shows income and no work, and neither month says anything true about performance. The accruals basis moves the income into March, when it was earned, and carries a receivable until the customer pays. Costs work the same way in reverse: electricity used in December is a December expense even if the bill arrives in February, so the year-end books hold an accrued expense as a liability. IAS 1 required financial statements, apart from the cash flow information, to be prepared on this basis; with IFRS 18 replacing IAS 1, that requirement now sits in IAS 8.
- Accrued expense: consumed now, paid later; a liability until settled.
- Accrued income: earned now, not yet invoiced; an asset until billed.
- Prepayment: paid now for a later period; an asset released to expense as that period passes.
- Deferred income: cash received before the work is done; a liability until the goods or services are delivered.
The basis is not universal, and tax is a separate question from reporting. In the UK, HMRC made the cash basis the default way for sole traders and partnerships to work out trading profits from the 2024 to 2025 tax year, while limited companies cannot use it, and a business switching between the two makes transitional adjustments for exactly the four items above. Accruals are posted through double-entry bookkeeping, they explain why cash flow and profit drift apart, and they drive most of the movement in working capital. Estimating them at each period end, and reversing them when the invoice finally arrives, is the routine craft of accounting and bookkeeping.