Accruals work exactly the same as prepayment but operate on the reverse basis. Accrued items are those for which the firm has been realizing revenue or expense without yet observing an actual transaction that would result in a journal entry. Some accrued items include salaries, past-due expenses, income tax expense, interest income and unbilled revenue.

For example, consider the case of salaried employees who are paid on the first of the month for the salary they earned over the previous month. Each day of the month, the firm accrues an additional liability in the form of salaries to be paid on the first day of the next month, but the transaction does not actually occur until the paychecks are issued on the first of the month. In order to report the expense in the period in which it was incurred, an adjusting entry is made at the end of the month. For example, in the case of a small company accruing $80,000 in monthly salaries, the journal entry might look like the following:


Account Titles and Explanation   Debit


1/30  Salary Expense 80,000  

Salaries Payable


Salaries accrued in September to be paid on Oct 1


In theory, the accrued salary could be recorded each day, but daily updates of such accruals on a large scale would be costly and would serve little purpose - the adjustment only is needed at the end of the period for which the financial statements are being prepared.