What is an accrual in accounting?

An accrual in accounting refers to recognizing an expense that has been incurred but has not yet been recorded in the financial statements. This concept is pivotal in the accrual basis of accounting, which aims to provide a more accurate picture of a company's financial position by matching revenues earned with the expenses incurred to generate them within the same accounting period.

For instance, if a company receives services in December but does not receive the invoice until January, the expense must still be recorded in December to accurately reflect the company's financial activities for that month. This practice ensures that financial statements are aligned with the economic reality of transactions, even if cash has not changed hands yet.

The other options refer to different concepts in accounting. An expense for which an invoice has been received pertains to accounts payable but does not capture the essence of accruals, which emphasizes the timing of recognition rather than receipt of invoices. A method for recording payments received in advance relates to deferred revenue, and a type of financial asset discusses an entirely different category on the balance sheet. Understanding that accruals focus on incurred expenses—regardless of invoice status—highlights their significance in achieving accurate financial reporting.