Accruals are a fundamental principle of UK financial reporting (and of accounting more broadly under both IFRS and UK GAAP). The accruals basis requires that income is recognised when it is earned and expenses are recognised when they are incurred — regardless of when cash is received or paid. This gives a more accurate picture of a business's true financial performance over an accounting period.
Accrued income and accrued expenses
Accrued income arises when goods or services have been provided to a customer but the invoice has not yet been raised or paid. The revenue is still recorded in the current period because the work has been done. Accrued expenses (also called accrued liabilities) are costs the business has incurred but not yet been invoiced for — for example, a utility bill covering the last quarter that arrives after the year end, or payroll for days worked that fall in one period but are paid in the next.
Accruals versus cash accounting
Some smaller businesses use cash accounting for VAT purposes, recording transactions only when cash moves. For statutory accounts purposes, however, the accruals basis is required for most UK companies. Understanding the difference matters when reading management accounts: a healthy profit figure under accruals does not guarantee there is cash in the bank, because revenues may not yet be collected and expenses may not yet be paid.
Why accruals matter when applying for business finance
A lender examining your accounts will expect accruals to be properly recognised. Understated accrued expenses inflate profit and can give a misleading view of the business's true cost base. Accurate accruals in your accounts help a lender assess the real profitability and sustainability of your business when reviewing a credit application.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What is net margin in a business context?, What is amortisation in business lending?.