Explain the accrual concept with the help of an example.
Explain the accrual concept with the help of an example.
According to this concept, a transaction is recorded at the time, it takes place and not at the time when settlement is done.
In other words,revenue is recorded when sales are made or services are rendered and it is irrelevant as to when cash is received against such sales. Similarly, expenses are recorded at the time when they are incurred and it is irrelevant as to when payment is made in cash for such expenses.
Thus, to find out correct profit and to show a true financial position of an enterprise at the end of accounting period, all expenses and income belonging to that particular accounting period are shown whether cash has been paid or received or not.
Example Goods are sold to Raju on 1st January 2016 on a credit of 3 months. In this instance, a sale will be recorded on 1st January 2016 although the amount will be received on 1st April 2016.
According to this concept, a transaction is recorded at the time, it takes place and not at the time when settlement is done.
In other words,revenue is recorded when sales are made or services are rendered and it is irrelevant as to when cash is received against such sales. Similarly, expenses are recorded at the time when they are incurred and it is irrelevant as to when payment is made in cash for such expenses.
Thus, to find out correct profit and to show a true financial position of an enterprise at the end of accounting period, all expenses and income belonging to that particular accounting period are shown whether cash has been paid or received or not.
Example Goods are sold to Raju on 1st January 2016 on a credit of 3 months. In this instance, a sale will be recorded on 1st January 2016 although the amount will be received on 1st April 2016.
