Accrual Basis of Accounting Definition and Example
Accrual Basis of Accounting Definition – An accounting method whereby revenue and expenses are booked when they are incurred, regardless of when they are actually received or paid. Revenue is recognized in the time period when the goods or services are delivered; expenses are recognized in the same period as their associated revenues.
In simple words, accrual basis of accounting records the transactions when revenues are earned. Unlike cash basis of accounting it does not records the transaction when the actual cash is received or paid. Transactions recorded under this basis of accounting also affects the Balance Sheet. If the transaction is made on cash, then there is either increase or decrease in cash. A transaction done on credit results either in increasing accounts receivables or increasing the accounts payable. Also if expenses are paid in advance, there is either increase or decrease in prepaid expenses.
Here, expenses are matched with revenues and a transaction is realized when the expenses incurred not when the cash is realized. Income statement is an example of this basis of accounting. In addition to this, this system is based on the double – entry system of accounting.
Accrual Basis of Accounting Example
In order to get a clear understanding of accrual basis of accounting definition, let’s discuss an example. ABC is a firm which made credit sale of Rs. 1,00,000 in the month of April 2017. The cash was received in the month of June 2017.
In cash basis of accounting, this transaction will record in the month June 2017. However in accrual basis of accounting the transaction will record in the month of April 2017.
Related Financial Terms of Accrual Basis of Accounting
- Cash Basis of Accounting Definition, Example and Importance
- Revenue Definition – Meaning and Examples
Importance of Accrual Basis of Accounting
Accrual Basis of accounting is one of the standard practice of accounting. It provides a clear picture of each and every transaction whether on cash basis or credit basis. On the other hand, cash basis of accounting only records the cash transactions.