What is an accrual in accounting?

An accrual in accounting refers to the recognition of revenues or expenses that have been incurred but have not yet been recorded in the financial statements. This concept is a fundamental aspect of the accrual accounting method, where transactions are recognized when they occur, regardless of when the cash is exchanged.

For instance, if a company has provided services to a client in December but will not receive payment until January, under the accrual basis of accounting, the revenue for those services would still be recorded in December. This ensures that the financial statements reflect the company's true financial position and performance for the period.

Conversely, other options represent different accounting concepts. Recognizing future cash flows pertains more to cash accounting or cash flow projections, while adjusting for prior periods hints at corrections for past errors. Recording prepaid expenses deals with expenses that are paid before the actual service or benefit is received, which is a separate accounting treatment. Thus, the essence of an accrual is firmly captured in the recognition of earned revenues and incurred expenses that haven't yet been recorded.