Accrual Accounting

Accrual accounting or accrual basis accounting is one of the accounting method that recognize revenues and expenses  when they are accrued, or accumulated regardless when the actual payment is made.

In contract with cash basis accounting , the idea is that transactions are recognized by matching revenues to expenses at the time the transactions occur rather than the time the payments are made. In most companies, accrual accounting considered as the most standard accounting and it is widely used everywhere. One significant benefit of accrual accounting or accrual basis accounting is this accounting method allows the corporations to include current cash inflows and outflows to be combined with future expected cash inflows and outflows to show more accurate view of corporations' financial condition.

 

For example for accrual accounting, a customer bought a washing machine with $ 1,000 from corporation ABC with his credit cards. Based on accrual accounting, the sales transaction had been made and now this $1,000 can be put into as revenue of corporation ABC even though corporation ABC does not receive $ 1,000 yet but it is expected to receive this $1,000 in the future. In this case, this is called accrued revenue.

Another example for accrual accounting is corporation ABC received a delivery order from its supplier for delivering 10 units of washing machine with $5,000 bills for corporation ABC. Corporation ABC has 60 days to clear the bills. In this case, although corporation ABC does not make the payment yet, but this $5000 can be charged as expense in corporation ABC's account. In this case, this is called accrued expense.