Accrual accounting refers to a method of recording revenues and expenses to predict the business flow irrespective of taking cash transactions into consideration.
In simple words, the accrual method helps to track income and expenses as they occur, regardless of whether or not cash has actually changed hands.
This topic is important for all IAS exam aspirants.
Give an example of accrual accounting.
An example of accrual accounting is mentioned below:
Suppose, a company delivers a product to a customer who has asked for a 30 days grace period in the next fiscal year, which starts a week after the delivery. The company recognizes includes this as revenue in its current income statement still for the fiscal year of the delivery, even though the cash is yet to be paid.
This is called accrual accounting. This form of accounting allows a business to view upcoming income and expenses in the following fiscal period.
What are the benefits of accrual accounting?
The major benefits of accrual accounting can be stated as follows:
- It allows a business to have a picture of its financial situation ahead of time.
- This form of accounting help companies to have a truer depiction of their resources and financial responsibilities.
What are the two main principles of accrual accounting?
The two major principles of accrual accounting are:
- Revenue recognition