Accruals in a balance sheet

Accrual accounting is an important prerequisite for financial reporting. Through accruals, the accrual principle can be implemented.

Accruals

With the implementation of the accrual principle, there are numerous situations that must be recorded as either revenue or expense, even though no cash flow has occurred yet. These are thus revenues that have not yet led to receipts, or expenses that have not yet led to disbursements.

In accrual accounting, a distinction is made between prepaid expenses (active accruals) and deferred income (passive accruals).

Active Accruals

Expenses already made which do not correspond to an expense at the balance sheet date are referred to as prepayments. These are prepaid expenses for future periods. The prepayments are recognized in the subsequent year and affect profits in a timely manner.

Passive Accruals

Deferred income relates to payments already received for services to be provided in a future period. Common cases of deferred income involve bonus agreements. For example, frequent flyer programs with airlines or discount programs based on purchase amounts in department stores (like Cumulus points).

The valuation of the services to be accrued does not pose major problems, as the expense or revenue is precisely defined in amount. The same principles as for the valuation of liabilities or receivables apply. A general allowance for doubtful accounts is not usually made.