Business Literacy Institute Financial Intelligence

YouTube
LinkedIn
Facebook
  • Financial Concepts
  • What We Offer
    • Products & Services
    • Live Training
    • Online Financial Training
    • Financial Intelligence Books & Comics
      • Book Excerpts
      • Comic Excerpts
    • Training Topics
      • Income Statement
      • Balance Sheet
      • Cash Flow Statement
      • Cash versus Profit
      • Financial Ratios
      • Return on Investment (ROI)
      • Advanced Topics
    • Financial Intelligence Test
    • Project Management for Profit Training
    • Webinars
    • Money Maps
    • Keynotes
  • Harvard
  • Blog
  • About
    • BLI Team
    • Articles
    • Our Clients
    • Testimonials
    • Interviews
    • Contact
You are here: Home » Financial Concepts » Accruals

Accruals

Definition:

An accrual is the portion of a revenue or expense item that is recorded in a particular time span. Product development costs, for instance, are likely to be spread out over several accounting periods, and so a portion of the total cost will be accrued each month. The purpose of accruals is to match costs to revenues in a given time period as accurately as possible. Determining accruals and allocations nearly always entails making assumptions and estimates.

 

Example:

Let’s use your salary as an example. Say that you worked in June on a new product and that the new product was introduced in July. The accountant determining the allocations has to estimate how much of your salary should be matched to the new product cost and how much should be charged to development costs. They must also decide how to accrue for June versus July. Depending on how they answer questions such as these, they can dramatically change the appearance of the income statement. Product cost goes into cost of goods sold. If product costs go up, gross profit goes down which affects product profitability. Development costs on the other hand go into R&D which is an operating expense and doesn’t affect gross profit.

 

Book Excerpt:

(Excerpts from Financial Intelligence, Chapter 2 – Spotting Assumptions, Estimates, and Biases)

Accountants use accruals and allocations to try to create an accurate picture of the business for the month. After all, it doesn’t help anybody if the financial reports don’t tell us how much it cost us to produce the products and services we sold last month. That is what the controller’s staff is trying so hard to do, and that is one reason why it takes as long as it does to close the books.

 

Look up another Financial Concept:

A  B  C  D  E  F  G  H  I  L  M  N  O  P  Q  R  S  T  V  W 

Look up another Financial Concept:

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Enroll in Online Financial Training today, it’s only $99

Enroll in the Training Now!

Looking for training on the income statement, balance sheet, and statement of cash flows? At some point managers need to understand the statements and how you affect the numbers. Learn more about financial ratios and how they help you understand financial statements.

Our online training provides access to the premier financial statements training taught by Joe Knight. Learn finance in a fun and clear way that's easy and painless.

Find out more

Business Finance Training

Learn the basics of the financial statements and the story your numbers tell. BLI offers:

Live Training

Ask questions and participate in discussions as our trainers teach you how to read and understand your financial statements and financial position.

Online Training

Learn at your own pace and go through the financial statements and ratios. Take the quizzes to see how you learned.

Log in to your online training account

We wrote the book on Finance!

Financial Intelligence Books

Financial Intelligence takes you through all the financial statements and financial jargon giving you the confidence to understand what it all means and why it matters.

Do you understand finance? Take our test

Are you smarter than the average manager? Take our nationally validated test to see how much you really know. See how you compare to your boss and co-workers.

Contact BLI

E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

Call: (818) 591-5955

Copyright © 2023 Business Literacy Institute · Log in to your online training account