what exactly is an accrual ? What are contra asset accounts



what exactly is an accrual ? What are contra asset accounts

In: Economics

Accurals are when you are acknowledging the liability without actually making a payment. (Salaries Accrued).

Contra Asset are used to for reductions of assets so that net amount can be reported. (Accumulated depreciation).

CPA here, first I want to mention the other method, cash basis. Every time you pay something or get money, you recognize it then. Most people are on cash basis, especially when it comes to taxes. If you get your paycheck for the last 2 weeks of December on Jan 3rd, that’s on next years taxes.

The difference in accrual basis is you book an entry, the accrual, to recognize something happened even if cash hasn’t been exchanged. Think of an electric bill for example; you use electricity all the time, but say the meter guy comes by on the 2nd day of the month to read it. Now it takes a couple of days for the bill to get printed and another couple for it to come in the mail, then the due date is like 20 days after that. Basically the example is for the power you used from Jan 1 to 31 you pay for on maybe Feb 25.

The accrual comes into play because if you had say production of 5 million whatever you makes. When you present your statement for January you wouldn’t say we spent $0 on electricity to make 5 million items. Unless you run on magic, that doesn’t make sense. That is why you accrue the electric bill, either an estimate or if you have the bill by that time, the exact amount.

Accruals apply to expenses and revenue. If a repair tech comes on the 28th, but you pay the bill the next week in a following month, you would accrue the expense in the prior period and have a payable. The tech’s company on the other hand would accrue revenue based on when the work happened, and have a receivable.

For Conta asset accounts, think of it as a credit being paired with an asset but not it’s not a liability. If you buy a machine, you have to depreciate it because it loses value. Instead of booking the depreciation to the machine account, you booked the credit to accumulated depreciation. Even though it is a credit balance, it is not a liability and stays on the asset side of the balance sheet, hence why it’s called a contra asset.