Accrual Accounting

Reviewed by Apoorva | Updated on Aug 27, 2020

Introduction

Accrual means the revenue earned and the expenses incurred by a company that decides the net income on the income statement of the company. Accruals affect the balance sheet as non-cash assets and liabilities are also involved. Therefore, accrual accounts include accounts receivable, accounts payable, tax liabilities, and accrued interest earned and payable.

What is Accrual Accounting?

Accrual-based accounting is an accounting technique that requires individuals to record every transaction in the books of accounts as and when they occur. Here, the entry is made at the time of transaction and not at the time of receiving the payment. This includes transactions even if the payment has not been made for that purchase of a particular product or service. The technique determines the financial health of an organisation by considering the current cash inflows and outflows along with the future cash inflows and outflows.

The other accounting method used is the cash accounting method. In this method, payment receipts are recorded when the payment is received, and the expenses are recorded when they are actually paid. The method is also known as cash-basis accounting.

Where is it Useful?

Accrual accounting is popularly used by businesses where a lot of credit transactions take place. When goods and services are sold on credit on a daily basis, it becomes tough for the business to keep track of the goods and services sold and the credit issued if the transaction does not end with the payment of cash at the time.

Drawback of Accrual Accounting

Businesses that use the accrual accounting system may end up paying taxes on the revenue shown in the books of accounts even before receiving payment for them.