Fatou runs a small printing shop. At the end of October, she checks her profit and feels pleased. The shop earned well, and her expenses look low.
Then the electricity bill for October arrives on the fifth of November. Suddenly, last month’s profit looks different. Was October really that good, or did some costs simply arrive late?
Many small businesses face this exact situation. The books look fine until a late bill quietly changes the story.
What an Accrual Really Is
An accrual is a cost you have already incurred but have not yet been billed for. The service was used, the work was done, or the goods were received. Only the invoice is missing.
Good accounting records an expense in the period it belongs to, not the period you pay it. This matches costs to the income they helped earn. It is the idea behind accrual accounting.
Think of electricity, water, internet, rent for the last days of a month, or wages earned but not yet paid. Which of these is waiting in your business right now?
A simple way to remember it: if you used it, you owe it. Whether the invoice has arrived is a separate question. The accountant’s job is to make sure the cost lands in the right month.
Why It Changes Your Profit Picture
Back to Fatou. Her electricity cost was about the same as every other month. But because the bill arrived in November, October carried none of it.
October looked more profitable than it really was. November then looked weaker, because it carried two months of costs. Fatou almost hired extra help based on a profit that was never real.
This is why accruals matter for decisions. Without them, profit moves up and down for reasons that have nothing to do with how the business performed.
Imagine you also owe staff for the last three days of the month. Wages are earned when the work is done, not when payday arrives. Leaving them out makes the month look cheaper than it was, and the next payday heavier.
How to Record Accruals Simply
You do not need complex software. At month-end, make a short list of costs you owe but have not been invoiced for. Estimate each amount from past bills or agreed rates.
Your accountant records the estimate as an expense and as a liability, which simply means money you owe. When the real invoice arrives, the entry is cleared and any small difference is adjusted.
Keep a note beside each estimate, such as last month’s bill or the agreed rate. That way, every figure can be explained later.
Fatou’s list had four lines: electricity, water, internet and a delivery driver’s wages. It took her ten minutes. Her accountant turned it into proper entries and reversed them the following month.
Estimates do not have to be perfect. A reasonable figure based on last month’s bill is far better than leaving the cost out. Small differences are corrected when the real invoice arrives.
Common Mistakes and Where to Start
The first mistake is ignoring a cost until the invoice shows up. The second is guessing wildly, with no reference to past bills or agreements.
A third is forgetting to reverse the estimate once the real invoice arrives, which counts the same cost twice. Would your current process catch these?
A fourth mistake is accruing only the large items. Several small unbilled costs can add up to a meaningful amount. A short, complete list usually beats a perfect, partial one.
Finally, some owners confuse accruals with prepayments. A prepayment is the opposite, where you have paid for something you have not yet used, such as a year of insurance. Both matter, and your accountant can spread them correctly.
Pick the three largest regular costs in your business. Utilities, rent and wages are usually the best candidates. Write down what you owe at month-end, even without an invoice.
After a month or two, the habit becomes routine. Your profit figures start to reflect what really happened, and your decisions rest on firmer ground.
Set a reminder for the last working day of each month. Spend ten minutes on your list before sending your records to your accountant. Over time, the list becomes a standing checklist that grows with your business.
See Your Real Profit, Month by Month
JS Morlu Gambia can help your business record accruals properly and produce monthly reports that show what really happened. Our accounting team can review the costs that often arrive late, so your profit figures are easier to trust. The aim is simple: clearer numbers that support better decisions about pricing, hiring and spending.