Accrual concept is the accounting concept introduced as a principle of Companies Act 1985. The income statement or profit and loss statement of a company is prepared on the basis of accrual concept. According to this concept, the revenues and expenses are recognized by the companies when they are earned or incurred and not when the actual money was received or paid. Another related concept is matching principle which says that revenues earned by the company and the expenses incurred by a company to earn that revenue has to be accounted in the same accounting periods. An example of accrual principle is a transaction of credit sales. If a company makes sale on credit then it will enter the revenue on the income statement regardless the company has received or not received the cash.
The accruals concept – one of the fundamental accounting concepts – requires that costs and revenues are recognised in the accounts when incurred or earned – not when the money is received or paid. An accrued cost is an estimate of the cost of something that has been incurred – and is owed – but which has not yet been recorded by the accounting system. Accrued income is an estimate of the income that is due from a transaction but which has not yet been recorded (e.g. A sales invoice has not yet been raised).
Accrual, by definition is the clustering together of things over a period of time. It is a concept of accounting. According to this concept the revenue or expense of a company is not recognized at the time at which it occurs. When a product is delivered to a customer, the company records a revenue, even though the customer will pay after 30 days. This is called accrued revenue. On the other hand, the company will record an expense in terms of sales commission when an item is sold, but the salesman will not get the commission until the end of that month.
The accruals concept – one of the fundamental accounting concepts – requires that costs and revenues are recognised in the accounts when incurred or earned – not when the money is received or paid.
Accrual or matching concept is the basic concept of accountancy. According to this all expenses incurred during the accounting period and total revenue earned from those expenses should be recorded in the same period of accounts regardless of the actual receipt or payment of cash.
