An accrual makes sure a cost lands in the month you actually received the benefit, even if the invoice hasn’t turned up yet.

Let’s jump into a little more detail.

Start with the problem accruals solve

Your profit and loss accounts are meant to show what it costs to run the business in a given month. But invoices can be lazy, they arrive late. A contractor works all through November and doesn’t send their bill until mid-December.

If you simply waited for the invoice, November would look artificially cheap and December artificially expensive, purely because of when it arrived. That’s a timing problem, not a real one. The accrual fixes it: it pulls the cost back into November, where the work actually happened. This is the “matching” idea you already know, costs sit in the same period as the benefit they paid for.

What an accrual actually is

An accrued expense is a cost that relates to the current period, but hasn’t yet been recognised in the P&L. Two things are true at once:

• You’ve received the benefit - the work was done, the goods arrived, the service was used.
• The paperwork hasn’t caught up - no invoice yet, and no payment yet.

Because you owe for something you’ve already received, an accrual is a liability on the balance sheet, a placeholder that quietly says “an invoice is coming for this.”

One thing worth locking in early: an accrual has no cash in it. If money had already left the bank, it wouldn’t be an accrual at all, it would be a prepayment (more on that later). Benefit first, paperwork later, that’s the accrual.

Follow one example all the way through

Your contractor works through November and will invoice around £4,500 (ignoring VAT for simplicity). You won’t see the invoice until December. At 30 November, you post:

Debit   Contractor Costs   £4,500     (goes into November’s P&L)

Credit  Accruals          £4,500     (a liability on the balance sheet)

That’s it. November’s numbers now tell the truth, and the £4,500 sits on the balance sheet waiting for the real invoice to show up.

Clearing the accrual when the invoice arrives

There are two accepted ways to do this. Both are fine. The only rule is: pick one and stick to it, the trouble starts when you mix them.

Method A - reverse it, then treat the invoice normally.

On the first day of December, you reverse the whole accrual:

Debit   Accruals          £4,500

Credit  Contractor Costs   £4,500

This empties the liability and drops a temporary £4,500 “negative cost” into December. Then, when the invoice arrives, you code it the ordinary way: Debit Contractor Costs, Credit Accounts Payable. December’s two entries cancel each other out, the cost stays parked in November, and whoever processes the invoice doesn’t need to know an accrual ever existed. Many teams set the reversal to post automatically on day one.

Method B - match the invoice straight to the accrual.

Here you leave the accrual sitting where it is. When the invoice arrives, you post it directly against the accrual:

Debit   Accruals          £4,500

Credit  Accounts Payable   £4,500

The liability clears, and there’s no impact on December’s P&L because the cost already lived in November. Fewer entries, but it depends on whoever codes the invoice knowing to send it to the accrual, not to the expense account out of habit.

When your estimate wasn’t spot on (the true-up)

An accrual is an estimate, so the invoice rarely matches to the penny. Say you accrued £4,500 but the invoice comes in at £4,750 for a few extra hours. That £250 difference is called a “true-up,” and it belongs in the month the invoice lands.

Whichever method you use, you end up in the same place: £4,500 sits in November and the extra £250 lands in December, so the accounts quietly catch up to reality. If the invoice comes in lower than you accrued, the same thing happens in reverse, a small credit lands in the later month.

So when does the cash actually move?

Last. It helps to see the whole lifecycle in order:

• Receive the benefit → you post the accrual. No cash moves.
• Invoice arrives → the accrual becomes an ordinary payable.
• You pay it → Debit Accounts Payable, Credit Bank. Now, finally, cash leaves.

The accrual itself never touches the bank - it’s purely a timing tool for the P&L. If you ever catch yourself crediting Bank as part of an accrual, that’s the signal something’s been mislabelled.

Two kinds you’ll meet: recurring and ad-hoc

Recurring accruals are the same thing every month - rent invoiced in arrears, utilities, an annual audit fee spread across the year, software billed quarterly but used monthly. The item is known and the amount is either fixed or a running estimate. These are easiest to manage as a schedule that rolls forward each month.

Ad-hoc accruals are one-offs - a legal bill for a specific matter, a marketing campaign that ran but hasn’t been billed, project fees. These are the ones that get missed, because nothing automatically reminds you they exist. They rely on someone remembering, or on a budget-holder answering a question in the last days of the close.

Accruals and their three cousins

Once accruals click, three related adjustments fall into place. They all answer the same simple question: which came first - the substance (the benefit or the delivery), or the invoice?

The mistakes people actually make

• Accrued it, then forgot to reverse it (Method A). The cost gets counted twice and the liability just sits there.
• Reversed it into the wrong month. That distorts two periods instead of none.
• Coded the invoice to the expense account instead of the accrual (Method B). Double count again - and harder to spot, because two lines are wrong in opposite directions.
• Left a recurring accrual running after the item was invoiced and paid. A balance that should be zero quietly isn’t.
• Cleared it against the invoice but ignored the difference. No true-up, so the accounts don’t reflect what things actually cost.

One habit prevents most of these: every line in your accruals balance should be something you can name and explain. If it’s just a number, it has stopped being a control. And keep an eye on materiality - you don’t accrue for trivial amounts, and part of a clean close is knowing where that line sits.

Where accruals fit in the month-end close

A sequence that holds up:

• Record the invoices you’ve already received first, so you don’t accrue for something that’s already on the ledger and double count it.
• Review last month’s accruals and identify the recurring and ad-hoc costs that have been incurred but not yet invoiced.
• Estimate each one with the best information you have, get them reviewed, and post them.
• Schedule the reversals (or track each item) so it can be matched to the real invoice and cleared or trued-up when it arrives.

In a group, it’s the same process per entity - just more of it. Reconciliation matters even more there, because a stale accrual in one entity is far harder to spot once everything is added together.

Doing this every month

None of the above is hard, but it is repetitive: roll the schedule forward, edit the estimates, drop the items that have been invoiced, add the new ones, post the journals, post the reversals, reconcile the balance back to the list - every single close, often under time pressure. The mechanical parts (the scheduling, the postings, the reconciliation) are exactly what accrual automation is built to take off your plate. What it doesn’t do - and shouldn’t - is decide the number. Whether something needs accruing, and for how much, always stays with the finance team.

In a nutshell

• An accrual puts a cost in the month you got the benefit, before the invoice arrives.
• The journal: debit the expense, credit accruals (a liability). No cash involved.
• Clear it when the invoice comes - either reverse then re-post (Method A), or match the invoice to the accrual (Method B).
• Fix any difference with a true-up. Cash leaves the bank last, not first.
• The cousins are just timing differences too: prepayment, accrued revenue, deferred revenue.
• Provisions are the uncertain relatives - same idea, more judgement.
• Golden rule: every accrual should be a line you can name and explain.

How Mayday handles accruals

Mayday's accrual automation gives finance teams one place to manage recurring and ad-hoc accruals: schedule the items, review what needs to be posted for the period, and post the accrual journals as part of month end rather than rebuilding a spreadsheet each cycle.

It does not replace accrual judgement, but it can augment it. Mayday AIR helps identify potential accruals that need to be made, while the finance team reviews the suggestion and decides the appropriate treatment. The software also removes much of the manual work around maintaining schedules, preparing journals and keeping everything reconciled.

The same problem shows up on the income side, where deferred revenue is billed ahead of delivery and released on a schedule, and in revenue recognition automation more generally.

If you'd like to see how Mayday could take your accrual schedules off a spreadsheet, sign up for a 30 day no-card free trial today or book a demo with one of the team.

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