Understanding Accounting Accruals: Getting Your Year-End Numbers Right

What Are Accruals, and Why Do They Matter?

If you've ever had a conversation with your accountant at year-end and wondered why they're asking about invoices you haven't sent yet, or expenses you haven't been billed for — welcome to the world of accruals.

Accruals are simply a way of making sure your accounts reflect what actually happened during the year, not just what cash moved in and out of your bank account. In accounting, we call this the accrual basis of accounting, and it's the standard way businesses record their finances.

The goal is straightforward: your year-end accounts should paint an accurate picture of your financial position. Let's walk through the four main areas we look at.

Revenue Received in Advance

The question to ask: Have you received money from a customer for work you haven't done yet?

This one catches a lot of people off guard. If a client pays you a deposit, or you invoice in advance for services you'll deliver after year-end, that money isn't actually "yours" yet from an accounting perspective.

Examples:

• A $5,000 deposit received in March for a project starting in May

• An annual subscription invoiced and paid before 31 March, but covering the next 12 months

• Retainer fees received for work to be completed next year

In these cases, we'll move that income out of your current year revenue and record it as a liability on your balance sheet. This means your income accurately reflects only what you earned this year.

Materiality note: We're not going to stress over a $200 deposit. But if you've received several thousand dollars for work you haven't started..

Revenue Accruals

The question to ask: Have you completed work this year that you haven't invoiced for yet?

This is the flip side. If you've done the work before year-end but haven't sent the invoice — the income still belongs in this year's accounts.

But here's where it gets interesting — not all unbilled work gets brought in.

We apply a few practical tests before we include it:

• Is it material? If it's a couple of hundred dollars, we'll likely leave it. If it's $5,000+ in unbilled work, it's worth capturing.

• Is the work genuinely complete? If you're 50% through a job, we'd only accrue the portion that's actually done (or potentially nothing, depending on the contract).

• Is it reasonably certain to be invoiced and collected? If there's a dispute brewing or the client seems shaky, we'd be cautious.

• Is it consistent with prior years? We aim for consistency in how we treat these year on year, so your accounts are comparable.

The bottom line: if you've done meaningful work before year-end that hasn't been billed, let us know.

Prepaid Expenses

The question to ask: Have you paid for something this year that actually relates to next year?

Just like revenue received in advance, expenses can be prepaid too. If you've paid for something before year-end but the benefit of that expense extends into the next financial year, we may need to split it.

Common examples:

• Annual software subscriptions

• Insurance premiums covering a period that straddles year-end

• Rent paid in advance

• Annual memberships or licences

For example, if you paid a $2,400 annual software subscription in February, and your year-end is 31 March, roughly 10 months of that cost belongs in the next financial year.

Materiality note: We won't lose sleep over a $150 subscription. But if you're paying $10,000+ annually for software or insurance — that's worth getting right.

Expense Accruals

The question to ask: Have you incurred costs this year that you haven't been billed for yet?

This is probably the most common accrual adjustment. Expenses get accrued when you've received the goods or services but the invoice hasn't arrived yet (or maybe arrived just after year-end).

Typical examples:

• Contractor work completed in March, invoice received in April

• Accounting fees for work done before 31 March

• Employee-related costs (bonuses, commissions, leave accruals)

• Interest on loans where the statement hasn't arrived

Materiality note: Again, a couple of hundred dollars here and there won't shift the needle. But a $5,000 contractor invoice that's sitting in someone's outbox needs to be in your accounts.

A Note on Materiality — Why We Don't Sweat the Small Stuff

You'll notice we keep mentioning materiality. This is an important concept, and it's worth explaining briefly.

Materiality means: is this amount significant enough to change how someone would view your financial statements?

For a business turning over $500,000 a year, a $300 adjustment is immaterial — it won't change any decisions. Spending time on it doesn't add value. But a $15,000 adjustment? That could affect your tax bill, your profitability picture, and how a bank or investor views your business.

As a general rule of thumb, we tend to focus on items above roughly $500–$1,000 for most small businesses, though this scales with the size of your business. If you're unsure whether something is worth mentioning, we’d prefer to be on the safe side!

A Few Other Things Worth Checking at Year-End

While we're talking about getting your accounts right, here are a few other items that often come up:

• Stock/inventory on hand — if you hold physical stock, we'll need a stocktake figure as at year-end

• Work in progress (WIP) — similar to revenue accruals, relevant for project-based businesses

• Bad debts — if you have debtors you genuinely don't expect to collect, we can write those off

• Fixed asset purchases and disposals — any big equipment bought or sold during the year

• Loans and new financing — any new debt facilities or changes to existing ones

The Takeaway

Accruals are really just about making sure your numbers tell the truth. They can feel a bit abstract, but once you understand the logic — income goes in when it's earned, expenses go in when they're incurred — it starts to make a lot of sense.

If you're heading into year-end and you're not sure what applies to your business, reach out. We love turning this kind of stuff into a straightforward conversation.

Disclaimer: This blog post is for informational purposes only and should not be construed as professional advice. It is recommended to seek the advice of a qualified accountant or tax professional regarding your specific circumstances.