An accrual concept in financial accounting is the basis of recording items of income or expense. Accounting standards mandate that it must be taken into account and recorded in the statements of financial position.
The purpose of recording an item on an accrual basis is to provide accurate and reliable financial information. For some of the income items, if a cash basis is adopted, these may be double-counted or undercounted.
How the Transactions Are Recorded in Accrual System?
As per this concept, the effect of transactions and other events is recognised when they occur and not when cash or cash equivalent is received or paid.
They are recorded in the transactions records and reported in the financial statements of the period to which they occur they relate.
A financial statement is prepared on an accrual basis to inform the users about past events involving payment and receipt in cash and obligations to pay some money in the future, and resources that represent cash to be received in the future.
For example, a firm sells goods for $55000 on 15th March 2021 and the payment is not received until 15th April 2021; the amount is due and payable to the firm on the date of sale, i.e. 15th March 2021. It must be included in the revenue for the year ending 31st March 2021.
Similarly, expenses are recognised when services are provided, irrespective of when the money has been received for these services are made.
For example, if the firm received goods costing $20000 on March 26th, 2021 but the payment is made on 12th April 2021, the accrual concept requires that expenses must be recorded for the year ending March 31st, March 2021. Although no payment has been made until March 31st, 2021, the service has been received, and the person to whom the payment should have been made is shown as a creditor.
The accrual concept is one of the most fundamental concepts in financial accounting. Under this concept, revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when the cash actually changes hands. This principle is based on the idea that financial statements should accurately reflect a company’s financial position and performance over a period of time.