Accrual Concept

What is accrual concept in accounwting?

Accrual concept means effects of transaction and events are recorded on mercantile basis i.e. when they occur ( not as cash or cash equivalent is received or paid). Further they are recorded in accounting record and reported in financial statements of the period to which they relate.

The financial statements are prepared on accrual basis to inform user not only past events but also obligation to pay cash in future and resources that shows cash to be receive in future.

To understand accrual assumption knowledge of revenue and expenses is required.

What is Revenue?

Revenue is the gross inflow of cash , receivables and other consideration arising in course of business activities. For instance sale of goods or rendering of services, interest , royalty or dividend income etc.

Example of Revenue in accrual concept

1. Mr. A started cloth merchandising. And invested Rs. 1,00,000 and bought cloth merchandise worth Rs. 1,00,000. He sold such merchandise for Rs. 1,20,000 , customer paid Rs.1,00,000 cash and assure to pay 20,000 shortly. Further, His revenue is Rs. 1,20,000 and it arose in ordinary course of cloth business. Mr. A receive in cash Rs. 1,00,000 and Rs. 20,000 by way of receivables.

2. An electricity supply undertaking supplies electricity spending Rs. 20,00,000 for fuel and wages and collects electricity bill in one month Rs. 23,00,000 by way of electricity charges . This is also revenue which arose from rendering services.

3. Lastly, Mr. Nikhil invested Rs. 1,00,000 in a business .He purchases machine paying Rs. 1,00,000 . He rented it for Rs. 20,000 annually is the revenue for Mr. Nikhil . Revenue arises from use of enterprises resources.

What is Expenses ?

Expenses is a cost relating to

=>operation of an accounting period , or

=> the revenue earned during the period.

Further, expense is the reduction in the value of asset as it is use to generate revenue.

Example

1. Salary/Wages
2. Office expenses
3. Printing and stationary expenses
4. Cost of material etc

Accrual means recognition of revenue and cost as they are incurred and earned and not money is received or paid. Accrual concept relates to measurement of income and identifying assets and liabilities ,

Illustration of Accrual concept

Mr. Aniket buys clothing of Rs. 50,000 and paying cash of Rs. 20,000 and sells at Rs. 60,000 of which customer paid only Rs. 50,000.

Here, his revenue is Rs. 60,000 not Rs. 50,000 cash received. Expenses (cost incurred for the revenue) is Rs. 50,000 not Rs. 20,000 cash paid. Hence according to the accrual concept profit is Rs. 10,000 (Revenue – Expenses)

As per accrual concept : Revenue – Expenses = Profit

Accrual concept provides foundation on which the structure of present day accounting has been developed.