Financial Accounting

Accrual Concept in the Financial Accounting

Accrual Concept

As per this concept, the effect of transactions and other events are recognised as and when they occur and not when cash or cash equivalent is received or paid, and they are recorded in the transactions records and reported in the financial statements of the period to which they relate.

A financial statement is prepared on the accrual basis to inform the users not only about past events involving payment and receipt in cash but also of obligations to pay cash in future and of resources that represent cash to be received in the future.

For example: a firm sells goods for $ 55000 on 15th March 2016 and the payment is not received until 15th April 2016, the amount is due and payable to the firm on the date of sale i.e. 15th March 2016. It must be included in the revenue for the year ending 31st March 2016.

Similarly, expenses are recognized at the time services provided, irrespective of the fact when the money has been received for these services are made. For example, if the firm received goods costing $20000 on 26th March 2016 but the payment is made on 12nd April 2016 the accrual concept requires that expenses must be recorded for the year ending 31st March 2016 although no payment has been made until 31st March 2016 through the service has been received and the person to whom the payment should have been made is shown as creditor.

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