What is accrual concept in accountancy?

Finance ManagementAccountingAcademic Content

In accrual concept, the transactions are recorded in the given time frame (accounting time). In this, transactions are recorded irrespective of payment made or not. Main idea is to recognise economic events by matching revenue and expenses.

In this, some may pay for the goods to be delivered for the seller. In this type, the transactions are recorded in liability account for the seller. When the goods are delivered, the payment is then transferred into revenue account. Generally accepted accounting principles (GAAP) and International financial reporting standards (IFRS) supports accrual concept.

Reasons to use accrual concept are explained below −

  • Complexity of business transactions.
  • Measures firm performance in a particular time frame.
  • Accurate and consistent reporting.
  • Revenue recognition.

Advantages of accrual concept are −

  • Accuracy level is high.
  • Recognised by company’s act.

Disadvantages of accrual concept are −

  • Difficult to maintain.
  • Complex.

Example

  • Salary expenses

If the salary expenses are paid at the end of month of service, then transactions are recorded immediately. If the salary expenses are paid in the following month, then transactions are recorded as follows −

Dr Salary expenses (income statement)

Cr salary expenses (balance sheet)

At the time of salary paid, transactions will be recorded as −

Dr Salary expenses (balance sheet)

Cr cash/bank (balance sheet)

  • Revenue

If the rewards are not transferred to the customers, then transactions for sales are recorded as follows −

For cash sales −

Dr cash (balance sheet)

Cr revenue (income statement)

For credit sales −

Dr Receivables (balance sheet)

Cr revenue (income statement)

raja
Published on 12-Aug-2020 14:35:01
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