what are accruals?

Accruals refer to the recognition of revenues and expenses in the financial statements of a company, even if the cash transactions have not yet occurred. It is an accounting method that aims to match revenues and expenses to the period in which they are incurred, rather than when the cash is received or paid.

Accruals are necessary because the timing of cash flows may not always align with the actual economic activity of a business. For example, a company may provide services to a customer in one accounting period but receive payment in the following period. In this case, the revenue is recognized in the period when the service was provided, even though the cash is received later.

Similarly, expenses are recognized when they are incurred, regardless of when the payment is made. This allows for a more accurate representation of a company's financial performance and position.

Accruals are typically recorded through adjusting journal entries at the end of an accounting period to ensure that the financial statements reflect the appropriate revenues and expenses for that period.