Accrual: Generally Accepted Accounting Principles and Revenue
Accrual concept
Accrual Concept is a fall-out of Accounting Period concept. This concept requires that expenses incurred for a particular accounting period should be reckoned in the same period, irrespective of the fact whether these expenses have been paid in cash or not in that year. The same holds true for revenues, i.e., revenues earned in a specific accounting period are construed as incomes of the same period, irrespective of their receipts.
This concept is also known as the accrual theory of accounting or accrual accounting. This concept applies equally to revenues and expenses. In the accrual basis of accounting Revenue is recognized when it is realized, that is, when the sale is complete or not. Similarly, the expenses are recognized in the accounting period in which they assist in earning the Revenues, whether the cash has been paid for them or not. Recognition of revenues and expenses for the income determination, therefore, does not depend upon the time when the cash is actually received for expenses or paid for expenses. The essence of revenue is that a mere promise on the part of a customer to pay the money for the sale or service or Interest, Commission, Rent etc. in future is considered as Revenue. Similarly, a promise on the part of the business entity to make payment for salaries, rent etc. ion future is considered as an Expense. Income (excess of Revenue or Expenses) is associated with the change in the owners’ equity and that is not necessarily related to changes in cash.
Example A business entity may sell goods for $20000 on December 25, 2004 and the payment is not received until January 25, 2005. The sale of goods would result in an increase in the assets (debtors) of the firm of $20000 and increase in the capital by the same amount (of course to be reduced by the cost of the goods sold) although no cash has been received. However, when the Cash is received on January 25, 2005, this would not result in Revenue. It would
Accrual Concept is a fall-out of Accounting Period concept. This concept requires that expenses incurred for a particular accounting period should be reckoned in the same period, irrespective of the fact whether these expenses have been paid in cash or not in that year. The same holds true for revenues, i.e., revenues earned in a specific accounting period are construed as incomes of the same period, irrespective of their receipts.
This concept is also known as the accrual theory of accounting or accrual accounting. This concept applies equally to revenues and expenses. In the accrual basis of accounting Revenue is recognized when it is realized, that is, when the sale is complete or not. Similarly, the expenses are recognized in the accounting period in which they assist in earning the Revenues, whether the cash has been paid for them or not. Recognition of revenues and expenses for the income determination, therefore, does not depend upon the time when the cash is actually received for expenses or paid for expenses. The essence of revenue is that a mere promise on the part of a customer to pay the money for the sale or service or Interest, Commission, Rent etc. in future is considered as Revenue. Similarly, a promise on the part of the business entity to make payment for salaries, rent etc. ion future is considered as an Expense. Income (excess of Revenue or Expenses) is associated with the change in the owners’ equity and that is not necessarily related to changes in cash.
Example A business entity may sell goods for $20000 on December 25, 2004 and the payment is not received until January 25, 2005. The sale of goods would result in an increase in the assets (debtors) of the firm of $20000 and increase in the capital by the same amount (of course to be reduced by the cost of the goods sold) although no cash has been received. However, when the Cash is received on January 25, 2005, this would not result in Revenue. It would
References: www.allbusiness.com/accounting-reporting/.../1308-1.html www.bizresearchpapers.com/Saleh.pdf accountinginfo.com/study/accrual-101.htm – www.prlog.org/my/cat-accounting www.fso.arizona.edu/training/tutorials/accounting/ www.wannalearn.com/Business_and_Careers/Accounting/ www.tutorialized.com/tutorials/Accounting/1 www.quickmba.com/accounting/ - www.financial-dictionary.thefreedictionary.com/Accrual+Accounting http://www.helium.com/items/1714234-consistency-concept-in-accounting http://www.helium.com/items/1713540-accruals