Investing term
What is Accruals?
Accounting entries that record revenue or expense before cash actually moves.
Accruals are accounting entries that record revenue or expenses when they're earned or incurred — not when cash changes hands. If a company delivers a service in December but gets paid in February, accrual accounting books the revenue in December, when the work was done.
Accruals are what separate profit (accrual-based) from cash flow (cash-based), and they make the income statement reflect economic reality rather than just the timing of payments. That's useful, but it's also where judgement — and manipulation — enters, since deciding when something is 'earned' involves estimates. Large or rising accruals, where profit runs well ahead of cash, are a classic warning that earnings may be lower-quality than they look.
Accruals record revenue and costs when earned or incurred, not when cash moves. They're what separate profit from cash flow — and when accrual-based profit runs well ahead of cash, earnings quality is suspect.
For example
A company signs a big contract and books the revenue now, though the cash won't arrive for months — an accrual that lifts reported profit ahead of actual cash.
Learn it by doing
That's Accruals in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).
Try the free lesson →Why it matters to you
Accruals matter because they explain the gap between profit and cash — and that gap is a key measure of earnings quality. When accrual-based profit consistently exceeds the cash a business actually generates, it's a signal that the earnings rely heavily on estimates and timing rather than real money, which often precedes disappointments and restatements. Understanding accruals is what lets you judge whether reported profit is solid or fragile.
⚠ Mistaking high accruals for high quality
Strong reported profit driven by large accruals — where earnings run well ahead of cash flow — is often lower quality than it appears, because it depends on estimates rather than realised cash. Research shows high-accrual earnings tend to be less durable. Treating accrual-heavy profits as reliable, without checking cash flow, can mean overrating a company whose earnings are more fragile than they look.