Accrual basis of accounting is one of the two methods of accounting, the other method being the cash basis of accounting. Accrual basis of accounting is a slightly more complex process of recording of transactions.
It is based on the concept that transactions are recorded as and when they occur. In other words, businesses that follow the accrual basis of accounting need to record revenues and expenses when a transaction occurs regardless of when payment for the same is received or made.
Accrual basis of accounting follows the matching principle, which states that expenses and revenues should be recognised in the same accounting period.
Accrual basis of accounting is the preferred choice of accounting for large businesses and those businesses that deal mostly in credit.
Working of Accrual Basis of Accounting
The general concept of accrual basis of accounting is that the financial transactions are recognised by matching of the revenue to the expenses when a transaction occurs instead of when the payment for the same is made or received.
This method helps in combining the current cash inflow and outflow along with the future cash flows and provides a more realistic view of the financial position of the business.
Accrual basis was adopted due to the increasing complexity of financial transactions that arose and the need for obtaining a more accurate view of the business.
Advantages of Accrual Basis of Accounting
The following are some of the advantages of accrual basis of accounting.
1. It helps the businesses in realising the true profit by providing a more realistic representation of the business.
2. Businesses that use an accrual basis of accounting are seen as more reliable than those using a cash basis method.
3. Auditing of financial statements is possible only when accrual basis is chosen as the method of accounting.
4. It allows for easy planning as the business accounts for all the revenues and expenses that will occur during the accounting period and prepare a budget accordingly.
Disadvantages of Accrual basis of Accounting
Following are some of the disadvantages of accrual basis of accounting:
1. Accrual basis of accounting can be complicated requiring more skill, time and resources.
2. It can give a skewed view of the short term financial position of the company.
This concludes the topic of the Accrual basis of accounting, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.