financial accounting class

What is accrual basis accounting?

Accrual basis accounting (accrual accounting, the accrual concept), depicts the effects of transaction and other events or circumstances on the reporting entity economic resources and claims in the period in which those effects occur, even if the resulting cash receipts and payments occur in different periods.

In simpler terms, accrual basis accounting is type of accounting in which revenue are earned and payment are incurred in given period even if the cash is not yet received or paid. It is opposite of cash basis accounting in which revenue is earned when cash is received and payment is incurred when cash is paid.

In accrual basis accounting revenue from sales and other income should be reported in the period when income arises (which might not be same as the period when the cash is received).



Also in accrual basis accounting the cost of sales in the statement of comprehensive income must be matched with the sales. income and matching expenses must be reported in the same financial period.
Other expenses according to accrual basis accounting  should be charged in the period in which they relate, not in the period in which they are paid for.

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