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Hello, I’m Sara, a Chartered Accountant who transitioned into running an online business. I understand just how daunting and confusing it can be to take the leap into self-employment. The questions, the uncertainties, and the steep learning curve are all challenges I’ve faced myself. Whether you’re in the early stages of planning to go self-employed, just dipping your toes into making money on your own terms, or already fully committed, this blog is dedicated to helping you every step of the way. Through detailed guides, expert tips, and practical advice, I aim to be your go-to resource. From mastering financial management and navigating tax obligations to setting up the foundations of your business, I’m here to provide you with the clarity and confidence you need to thrive in your self-employment journey.

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What Is an Accrual?
In accounting, an accrual is an adjustment made for costs that a business has incurred but hasn’t yet received an invoice for. This ensures that expenses and liabilities are accurately reflected in the financial statements.
 
Understanding Accruals
Accruals represent costs or liabilities that are recognized before the actual invoice is received or payment is made. This adjustment allows businesses to record expenses in the period they occur, aligning costs with the revenues they help generate.
Examples of Accruals
Common accrued costs include:

  • Rent

  • Utility bills (electricity, gas)

  • Phone bills

  • Accounting fees

  • Interest costs

  • Freelancer and subcontractor payments


Do Accruals Include VAT?

  • For VAT-Registered Businesses: Accruals should not include VAT, as VAT is reclaimable and not considered a business expense.

  • For Non-VAT Registered Businesses: Accruals should include VAT, as the VAT is part of the cost.


Examples of Accruals

  1. Commission Payment: On 31 December 2023, Eddie Limited needs to record a £5,000 commission expense for December, even though the payment will be made in January 2024. The company must accrue this £5,000 in its financial statements for 31 December 2023.

  2. Rent Accrual: On 31 March, if the landlord hasn't sent an invoice for £7,500 covering March 2024, the business should accrue this rent to account for the expense in March.

  3. Freelancer Costs: On 30 April, if a freelancer who worked in April hasn't yet invoiced, estimate the amount and accrue it to ensure the cost is included in the April accounts.


Why Accruals Matter
Accruals provide a more accurate financial picture by ensuring all incurred costs are reflected in the financial statements for the correct accounting period. This practice aligns with the matching principle, which dictates that expenses should be recorded in the same period as the revenues they generate.
Double-Entry Bookkeeping for Accruals

The double-entry for an accrual is:

  • Debit the expense account (Profit and Loss Account)

  • Credit the accruals account (Balance Sheet)


Example:
For the missing rent invoice of £7,500, the initial accrual entry would be:

  • Dr Rent Expense (P&L) £7,500

  • Cr Accruals (Balance Sheet) £7,500


When the landlord sends the invoice, record it as a trade creditor and reverse the accrual:

  • Dr Accruals (Balance Sheet) £7,500

  • Cr Rent Expense (P&L) £7,500


Related Topics

  • Trade Creditors

  • Prepayments



























     

What is an Accrual?

Finances

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