Accrued: Overview, definition, and example
What does accrued mean?
Accrued refers to amounts that have been earned or expenses that have been incurred but not yet paid or received. This term is often used in accounting, finance, and contracts to track obligations or entitlements that accumulate over time and are settled at a later date.
For example, a business might accrue interest on a loan, meaning the interest adds up daily but is only paid monthly or quarterly. Similarly, employees may accrue paid time off (PTO) over time, allowing them to use it later.
Why is accrued important?
Accrued amounts ensure that financial records accurately reflect obligations and entitlements at any given time. For businesses, this helps with budgeting, cash flow management, and financial reporting. Without recognizing accrued amounts, companies might underestimate expenses or overstate profits.
Accrual accounting also ensures compliance with financial regulations, as businesses must report income and expenses when they are incurred, not just when cash is received or paid.
Understanding accrued through an example
Imagine a consulting firm provides services to a client in December but won’t receive payment until January. Under accrual accounting, the revenue is recorded in December because that’s when it was earned, even though the cash hasn’t been received yet.
Another example is an employee who earns two vacation days per month but doesn’t use them immediately. These vacation days are accrued, meaning they add up over time, and the employee can take them later. If they leave the company, they might be entitled to a payout for their unused accrued vacation days.
An example of an accrued clause
Here’s how a clause like this might appear in a contract:
“Any accrued but unpaid amounts under this Agreement shall be payable within [X] days following termination or expiration.”
Conclusion
Accrued amounts represent obligations or entitlements that build up over time and are settled later. Whether it’s revenue, expenses, or benefits, understanding accruals helps businesses maintain accurate financial records, manage cash flow effectively, and comply with accounting standards.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.