Accruals
An accrual is an accounting adjustment that recognises income or expenditure in the period it is earned or incurred, rather than when cash changes hands, ensuring the profit and loss account reflects economic reality for that period.
Accruals are the mechanism that makes accounts match the period they cover rather than the dates money moved. If your business delivers £4,000 of work in March but the invoice is raised and paid in April, an accrual posts the income to March so that month’s profit and loss tells the truth. The same logic applies to costs: a gas bill covering January to March that arrives in April should be accrued into March, not dumped into April when it is paid.
How it works in Xero
In Xero, accruals are posted as manual journals. A typical month-end accrual for an unpaid supplier invoice might debit an accruals expense account (for example, Professional Fees) and credit a balance-sheet accruals creditor code. When the invoice arrives the following month, you reverse the journal and post the real bill, keeping the ledger clean. Xero supports repeating journals, which reduces the manual effort for predictable accruals such as monthly payroll costs or regular contractor fees.
Without accruals, monthly management accounts swing with cash timing rather than trading activity — a common reason a profitable March can look like a loss. Getting accruals right at month-end is also a prerequisite for a clean trial balance and accurate VAT returns, since misposted periods can distort both.