Introduction
It is one of the important accounting principles and is the basis of many accounting requirements set out in either of generally accepted accounting principles or alternatively International financial reporting standards. It is the foundation of the modern accounting. The principle requires the accountants to recognize and subsequently report the transaction on the basis of the actual occurrence of the same rather than going for the basis of the corresponding receipt and payment. The actual occurrence of the transactions may vary from the delayed or alternatively the accelerated recognition of the transactions keeping in consideration the related cash flows.
Explanation of the Accrual Concept
The concept is the basis of one of the important component of the financial statement referred to as the cash flow statement. When the main financial statements’ components that is the Balance sheet and the profit and loss account are prepared using the accrual convention than the eventual profit reported by the adopted method of accrual basis would differ from the cash assets of the organization that may be in hand or alternatively deposited in the bank. In order to reconcile the two figures that is the profit and the cash assets of the organization, cash flow statement comes to the rescue and assists in the reconciliation of the two figures particularly when the cash flow statement is prepared using the indirect method which adjusts the profit figure for working capital changes and after reporting the cash flows related to the investing and financing activities yields the net cash assets at the reporting date.
Adjusting Entries
The accrual basis of the accounting necessitates the passing of the adjusting journal entries at the end of the reporting period to reflect the true nature of the prepayments and accruals that were carried forward at the commencement of the specific accounting period or recognized during the accounting year. After the passing of the adjusting entries, the accounts whether they relate to the accruals or prepayments and their corresponding revenue and expenses reflect the true position at the end of the reporting period after which financial statements can be easily prepared.
Accrual concepts lead to the recognition of the offsetting items in the financial statements. For instance, when unearned revenue is recognized as liability it is offset against the corresponding revenue when the conditions for revenue recognition are met.
Cash basis of the Accounting
The opposite of the accrual basis of accounting is the cash basis of accounting. It is usually adopted by the sole-proprietorship form of organizations. The output of the cash basis of accounting is usually the receipt and payment account with eventual reporting about the excess or cash deficit. The cash basis of the accounting is not the recommended method of preparing the financial statements by either of the international financial reporting standards or the generally accepted accounting principles.
Examples
The important examples that can be quoted in relation to the accrual concept of the accounting are the interest expense payable, wages expense payable.
Conclusion
It is the foundation of the modern accounting. The principle requires the accountants to recognize and subsequently report the transaction on the basis of the actual occurrence of the same rather than going for the basis of the corresponding receipt and payment. The accrual basis of the accounting necessitates the passing of the adjusting journal entries at the end of the reporting period to reflect the true nature of the prepayments and accruals. The opposite of the accrual basis of accounting is the cash basis of accounting. It is usually adopted by the sole-proprietorship form of organizations.
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