Accrual Accounting

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Summary

What is Accrual Accounting? Meaning.

Accrual Accounting is the practice of recording revenues when products or services are sold, and recording expenses when they are incurred, irrespective of the dates on which the associated cash flows occur.


Standard, cash accounting practice is to record and recognize both revenues and expenses in the period in which they incur. In cash accounting, revenues are recorded when cash is actually received, and expenses are recorded when cash is actually paid (no matter when they were actually invoiced).


Accrual Accounting versus Cash Accounting

  • RECOGNITION: Accrual Accounting recognizes revenue when goods or services have been provided and expenses when resources have been used. Cash Accounting recognizes revenues when cash is received and expenses in the form of expenditures when bills are paid.
  • FOCUS: Accrual Accounting focuses on when revenues are earned or resources are consumed. Cash Accounting focuses on cash movement.
  • AIM: The primary aim of accrual accounting is to measure and reflect the profitability of the company. The primary aim of cash accounting is to measure and reflect the cash situation of the company.
  • USERS: Accrual accounting is used by private sector companies and by some public organizations as well (in modified form, see below). Cash accounting is used by some public organizations.

Modified Accrual Accounting

Increasingly used by governmental organizations. In modified accrual accounting:

  • Expenditures are recognized when resources are received.
  • Revenues are recognized when they are measurable and available within the accounting period or shortly afterwards (focus on financial resources).

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Accrual Accounting Special Interest Group.



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Accrual Basis Accounting versus Cash Basis Accounting
The difference between the two types of accounting is the moment when revenues and expenses are recorded:
- In cash basis accounting, revenues are recorded when cash is actually received and expe...
7
 
The Bank Reconciliation Statement
A bank reconciliation statement is a statement that makes a company's records of its bank account consist with the bank statement or bank records and make corrections if required. Such statement compa...
5
 
The Matching Principle
The concept of matching in accounting and finance is based on the relationship of the revenue and expense that demonstrate the cause and effect relationship between them. It requires to match the cost...
5
 
Compound Journal Entries. Definition and Types
2 Heads of Account Every business transaction always affects 2 heads of account. Each debit account must have a corresponding credit account. Credit and debit must be equal. This is referred to as th...
4
 
🔥 NEW The (Stable) Monetary Unit Assumption
If you go through an entity's financial statement, you will see that every business transaction or event is recorded in monetary term or currency. Why is that so?

One of the recognizable an...
3
 
The Economic Entity Principle in Accounting
The economic entity principle is one of the fundamental principles of accounting. It separates the owner from the business as two different entities:
The owner
The business

Ac...
3
 
The Principle of Going Concern
The going concern principle is the fundamental accounting principle that assumes that a business (entity) is financially sound enough so that it will remain operational in the foreseeable future. In o...
3
 
Modified Accrual Accounting
What does modified accrual accounting mean? This is an accounting method commonly used by government agencies that combines accrual-based accounting with cash-basis accounting.
Modified accrual ...
3
 
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Cash, Accrual and Modified Accrual Accounting In-depth

Accrual Accounting, Modified Accrual Accounting, Cash Accounting, Financial Management
Presentation about budgeting and accounting thereby differentiating between the cash and accrual approaches. The present...

Journal Entry and It's Types

Bookkeeping, General Journal, Accounting
This presentation covers the concept and application of journal entries and their types. What is a Journal Entry? ...

Accrual Accounting and Income Determination

Accrual Accounting, Income Determination
What are the distinctions between cash-basis and accrual-basis earnings? Why is accrual-basis income generally a better...

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