Accrue: Definition, How It Works & Main Types of Accruals Explained

When it comes to managing finances—whether in a business or your personal accounts—the term ‘accrue’ pops up everywhere. But what does it really mean, and why is it so fundamental to modern accounting? Let’s unpack the concept, explore how accruals work in the Australian context, and break down the two main types of accruals that underpin accurate financial reporting in 2025.

What Does ‘Accrue’ Mean in Finance?

To ‘accrue’ simply means to accumulate or build up over time. In the world of finance and accounting, it refers to recognising income or expenses when they are earned or incurred, not necessarily when the cash is exchanged. This approach is crucial for painting a true picture of a business’s financial health at any given moment.

The accrual basis of accounting, as opposed to the cash basis, is the backbone of Australian financial reporting standards. The Australian Accounting Standards Board (AASB) continues to mandate accrual accounting for most businesses in 2025, aligning local practice with international standards (IFRS).

• Example: If a Melbourne-based consulting firm completes a project in June 2025 but doesn’t get paid until July, the revenue is accrued in June.
• Example: A small business receives a phone bill in April but pays it in May; the expense is accrued in April.

How Accruals Work in Practice

Accruals are all about timing. They ensure that revenues and expenses are matched to the period in which they’re actually earned or incurred, regardless of when the cash changes hands. This practice is required for companies lodging full financial statements with ASIC or the ATO, and it’s increasingly used by startups, sole traders, and growing SMEs in Australia to gain deeper insight into performance.

In 2025, digital bookkeeping tools such as Xero and MYOB have made accrual accounting more accessible than ever, automatically tracking and flagging accruals for review at tax time. This is particularly relevant given the ATO’s continued focus on compliance and accurate reporting for GST and income tax obligations.

• Improved financial analysis: Accruals allow for more accurate profit and loss analysis, helping businesses plan for future cash flows and tax liabilities.
• Regulatory compliance: The ATO requires most Australian businesses above a certain turnover threshold to use accrual accounting, especially for GST reporting.
• Investor confidence: Lenders and investors prefer accrual-based statements because they reflect true economic activity, not just cash movements.

The Two Main Types of Accruals

There are two major types of accruals: accrued revenues and accrued expenses. Both play a pivotal role in financial statements and tax filings.

1. Accrued Revenues

Accrued revenues are earnings that have been recognised but not yet received in cash. This usually happens when services have been delivered, or goods provided, but the customer hasn’t paid yet. In 2025, with the Australian economy’s continued tilt towards service industries and flexible payment terms, accrued revenue tracking is more important than ever.

• Example: An IT consultancy invoices a client at the end of June for services rendered but expects payment 30 days later. The revenue is accrued in June.
• Reporting tip: Accrued revenues are shown as ‘Accounts Receivable’ on the balance sheet until payment is received.

2. Accrued Expenses

Accrued expenses represent costs that have been incurred but not yet paid. These might include wages, utilities, or interest expenses. For Australian businesses, tracking these is essential for meeting ATO requirements and for budgeting accurately—especially in a year of rising energy and wage costs.

• Example: A Brisbane café pays its staff fortnightly, but the pay period straddles the end of the financial year. Wages earned by staff in June but paid in July are accrued as an expense in June’s accounts.
• Reporting tip: Accrued expenses appear as ‘Liabilities’ on the balance sheet until the actual payment is made.

Why Accruals Matter in 2025

Australia’s financial landscape is evolving rapidly, with new ATO rules on digital record-keeping and real-time reporting in effect for the 2024–25 financial year. Accrual accounting isn’t just a compliance box to tick—it’s a tool that empowers smarter business decisions and clearer insight into profitability.

• Better cash flow planning: By recognising obligations and income early, businesses can avoid nasty surprises at tax time.
• Accurate tax reporting: The ATO is ramping up data-matching and expects businesses to keep accurate, accrual-based records—especially as Single Touch Payroll (STP) and e-invoicing become the norm.
• Benchmarking and growth: Understanding accruals helps Australian businesses compare themselves accurately to industry peers and manage seasonal fluctuations.

Conclusion

Understanding how accruals work is more than an accounting technicality—it’s a key to confident decision-making, smart tax management, and sustainable growth. Whether you’re a startup founder, a sole trader, or managing the books for an established business, mastering accruals will help you stay ahead in 2025’s fast-moving financial environment.