Accruals concept is basic assumption in accounting process. Accruals concept means when a payment or due are arise especially an amount of money that is yet to be paid or received(accrued) i.e., not received or paid actually, at the end of the accounting period. Accrual Concept is based on cash basis of accounting. Accrual means that revenues are recognized when they become receivable. Suppose the physical cash is received or not received and the expenses are recognized when they become payable though cash is paid or not paid. In both the transactions will be recorded in the accounting period to which they it relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses. This accrual concept is one of the important concept of accounting.
Accrual Concept Basics and Advantages
How Accruals Concept Works?
This concept under accounting assumes that revenue is realized at the time of sale of goods or services irrespective of the fact when the actual cash is received.
For example, a business entity sells goods worth for $10,000 on 20th March 2012 and the payment is not received until 5th April 2013, the amount is due and payable to the firm on the date of sale i.e. 20th March 2012.
It must be included in the revenue for the year ending 31st March 2012.
On the other hand, the expenses are recognized at the time services provided, irrespective of the fact when actual payment for these services is made.
For example, if the business entity received goods is $40,000/- on 25th March 2012 but the payment is given on 5th April 2013, as per the accruals concept, it requires that expenses should be recorded for the year ending 31st March 2012 in profit and loss account but still no payment has been given until 31st March 2012 though the service has been received and the person to whom the payment should have been made is shown in liabilities side as creditor. It help in knowing actual expenses and actual income during a particular time period. Accrual concept is useful in calculating the net profit of the business.
Accrual Accounting Examples
Under accruals concept the effect of financial transaction and other events are recognized on mercantile basis. When they accrue or deemed to accrue and not as real cash or a cash equivalent is received or paid and they are recorded in the accounting record and reported in the financial statements of the periods to which they relate financial statement prepared on the accrual basis inform users not only of past events involving the payment and receipt of cash but also of obligation to pay cash in the future and of resources that represent cash to be received in the future.
For Example: – Mr. Tamil buy books of worth $60,000,a paying cash $30,000 and sells at $80,000 of which buyer paid only $50,000. Now, his revenue is $80,000, not $50,000 of cash received. And on the other hand expenses or cash is $60,000, not $30,000 cash paid. Hence the accrual concept based profit is $20,000 i.e., Revenue less expenses.
Accruals Concept – The concept, that profit is the difference between revenue and expenditure.
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Originally posted 2013-10-16 06:20:19.