Accruals

Accruals are accounting entries that record a cost or revenue in the period it is incurred or earned, even when no cash has yet changed hands. A sub-contractor who finishes work on the last day of October and invoices in November still created a cost in October. Under accrual accounting, that cost is recorded in the right period - not when the invoice arrives. For project-based businesses running multiple jobs across different billing milestones, this distinction directly affects how accurately a profit and loss statement reflects actual trading performance.

Why Accruals Matter in Project-Based Businesses

The gap between work happening and invoices arriving is a constant feature of construction, AV integration, office furniture installation, and promotional merchandise operations. A sub-contractor may complete groundworks in one month and submit their invoice the next. If that cost is not accrued, the earlier month's job margin looks healthier than it is - and the following month looks worse for no operational reason. Neither figure is accurate.

The same principle applies to revenue. A contractor who reaches practical completion in September but does not issue the final invoice until October has earned that revenue in September. Under cash accounting, it disappears into the following month's numbers. Under accrual accounting, cost and revenue are both recorded in the period they belong to.

Three accrual entries that project businesses should raise at month-end:

• Accrued sub-contractor costs: work complete, supplier invoice not yet received
• Accrued materials costs: goods delivered to site, supplier invoice still pending
• Accrued revenue (unbilled receivables): milestone reached, customer invoice not yet raised

What Goes Wrong Without Accrual Discipline

The most common failure is recognizing revenue on a cash or near-cash basis while deferring costs until supplier invoices arrive. This produces inflated gross margins on completed jobs, followed by a correction wave in the next period when the costs land. Across 20 concurrent jobs, month-end margin figures become unreliable as a management tool.

A practical example: a roofing contractor completes three large commercial jobs in the final week of October. Sub-crew invoices arrive between the 5th and 15th of November. Without accruals, October's P&L shows a 38% gross margin - close to target. When the sub-crew invoices land and are correctly matched, the trued-up view puts October's margin at 27%. Business decisions made in November were based on a figure that was 11 points wrong.

The fix is a consistent month-end discipline. Before closing any period, review all open and recently completed jobs and raise manual accrual entries for any confirmed sub-contractor or supplier costs not yet invoiced. Reverse these automatically when the actual invoices arrive. Xero, QuickBooks, and FreeAgent all support manual accrual journals with automatic reversal in the following period, keeping the process manageable without specialist accounting software.