Basics

• “To accrue” and “to amortize” are both verbs. They are processes of recording, respectively, unrealized income and depreciation. They are similar in they both deal in firm value; they differ in how this value exists, both on paper and in reality. “To accrue,” roughly speaking, means to reconcile a firm's income with its cash flow. The main difference between amortization and accruals is that the former deals with the value of capital over time, while the latter deals with anticipated cash flows. They are both terms that deal with recording value over time.
  
  

Accruals

• "To accrue" means to reconcile two different concepts of income. For example, you own an insurance firm and have just sold an expensive life insurance policy that will, over the course of the policy, gross your firm $700,000. The policy will last 14 years based on the way you've organized the premium payments, so the premium is therefore $50,000 yearly. As soon as the papers are signed, making the insured legally liable for the regular payments, your accountant writes down on your firm's books that you have just made $700,000. Your accountant has just performed an accrual.
  
  

Potential

• When an accountant writes down the full amount of the insurance premium as “income” for that day, he has “accrued” the books and the firm's value with the next 14 years of payments. The accountant can also “accrue” when he estimates, given the firm's past history with similar policies, how much the firm will owe on claims throughout the 14-year future of this policy. The point is that both income and expenses are written down on the balance sheet as if they are realized when they are not. It will take a full 14 years to realize the $700,000 minus any claims, but these are written down as income the moment the papers are signed.
  
  

Depreciation

• “To amortize" something is to record it as depreciated. In some cases, “to amortize” is “to depreciate” in a financial sense. It is a record of the slow decay of a long-lived and long-term asset. If a firm buys an expensive machine that will improve the production of its product, the yearly amortization is recoded at the time of purchase. If the machine costs $500,000 and it is estimated to amortize at $20,000 a year, the accountant records the purchase of the machine at $480,000. To record the purchase this way is “to amortize” it. The following year, the accountant will record the value of the machine as $460,000, and so on.