Accruals as an earnings management instrument are defined as the difference between the reported income and the cash flow generated by an entity during a given period. Accruals represent the cumulative effect arising from applying the accrual basis in the accounting model.

Earnings management is an engineering of financial statements through manipulative actions of management towards maximization of performance results (as measured in earnings). Increasing or inflating earnings is meant to reflect good company performance, though the actual earnings information provided in the financial statements would be misleading and irrelevant to users of financial statements. Earnings management is generally categorized into two different types, namely real earnings management and accrual earnings management. This distinction is based on the direct or indirect effect on cash flow. Real earnings management involves manipulation of earnings through operational activities that directly affect cash flow. On the other hand, accrual earnings management is the manipulation of earnings management through estimation (accounting estimates) and accounting methods that create no direct impact on cash flows.

Generally, for income smoothing, managements set aside reserves in periods of good performance, in order to use them to increase earnings in periods of poor performance, rendering, hence, the reported earnings less variable than the actual economic performance of the entire entity. For that purpose, managers can use both accruals and cash flows, though the latter is costlier and less preferred due to the high costs associated from cash flows manipulation, in addition to its visibility as to various stakeholders. Accruals manipulation is a preferred option for normalizing the reported earnings series.

As a formula,  the measure of accruals expressed is the total or observed accruals (TAC) for company (X) in period (t):

Accruals comprise two components: (1) a component of short-term or working capital accruals (STAC), which corresponds to the variation of the working capital; and (2) a component of long-term accruals (LTAC), which corresponds to the depreciation and amortization expense of the respective period.