Accruals
Accruals are a form of accounting practice that can help to provide an more accurate representation of the economic condition of a project programme or organisation at the end of an accounting period or year.
Accruals are amounts that are unaccounted for, either because they are revenues earned or expenses incurred, that have not yet been recorded in the accounts. Recording, or estimating accruals enables an organisation to keep records of revenue and expenses that have not been received or incurred. This is particularly important in the construction industry where the supply chain is complex and extended, and invoices may not be paid for several weeks, or even months.
This differs from the cash method of accounting which involves the recording of revenue when it is received and the recording of expenses when they are paid. This raises the problem that revenue is not tied to the expenses that contributed to the generating of the revenue, which can make it difficult to identify the profitability of operations.
In the accrual method, income is reported in the year that the expenses that were incurred to generate that income have been paid. Expenses are reported only once goods and services have been delivered or provided.
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