Accounting means managing economic transactions and with its help showing the performance, status, etc. of the organization in numbers, but it is very important to know when to record which economic transaction, because the accuracy of the performance, status, etc. of the organization depends on this.
In accounting, there are three bases provided for when to record economic transactions in the books, which is called the basis of accounting, and one of them is the accrual basis of accounting.
According to the accrual basis of accounting all economic transactions are managed and management is also done on the basis of the time of transaction occurrence, although the nature of the business or other elements may affect it.
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What is the Accrual Basis of Accounting?
Accrual basis of accounting is a base for accounting work that tells when to record a transaction and it is the most commonly used basis in accounting. According to this, the transactions are recorded and managed at the time when the transaction occurs, irrespective of whether it is a cash transaction or a credit transaction.
This basis is also accepted by Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS) etc., and it follows the matching principle whereby assets and liabilities or expenses and revenues are equal at a point of time.
In this, all the transactions are recorded on the basis of time of occurrence, which helps in ascertaining the financial position, financial performance, etc., and also helps in calculating the tax correctly.
For example, if a purchase is made on credit on 17.07.2024, the purchase will be recorded in the books on 17.07.2024, even if the payment is made at the same time or later. Similarly, if a credit sale was made on 15.07.2024, the sale will be recorded in the books on 15.07.2024, even if the payment is made on 17.07.2024.
Features of the Accrual Basis of Accounting
Following are the features of accrual basis of accounting:
1. Base:
The accrual basis of accounting is a base for accounting work that is used to determine when to record a transaction in accounting and is one of the three types of basis of accounting. If the organization wants to record or manage the transactions according to this basis then it has to select it before starting the accounting work.
2. All Record:
According to this basis, all economic transactions are recorded in the books, whether it is a credit transaction or a cash transaction. This is because its principle is not based on cash alone, it is also based on credit. In simple words, the accrual basis of accounting considers all economic transactions as equal and important.
3. Same Time:
Any organization that performs accounting functions according to this basis has to record the transactions based on the time when they occur. For example, if a transaction has occurred today, it has to be recorded today itself and if the transaction has occurred yesterday, it has to be recorded yesterday itself and if the transaction will occur tomorrow, it has to be recorded tomorrow itself.
4. Help to Management:
This basis helps the management to calculate the gross and net profit or loss and also helps in preparing financial reports like balance sheet, cash flow statement, etc. This is possible because in it the transactions are recorded on the basis of the period of occurrence and all the financial transactions are recorded.
5. Recognized:
The accrual basis of accounting is recognized or accepted by the principles, standards, bodies, organizations, etc. such as Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), etc. and this is because it helps in achieving the accounting objective in the correct amount.
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QNA/FAQ
Q1. What is the accrual basis of accounting?
Ans: The accrual basis of accounting is a base for accounting work that tells when to record a transaction.
Q2. Are credit transactions also recorded in accrual basis of accounting?
Ans: Yes, credit transactions are also recorded in accrual basis of accounting.
Q3. In the accrual basis of accounting transactions are recorded at the time the transaction occurs is this correct?
Ans: Yes, that’s correct, in accrual basis of accounting transactions are recorded at the same time when the transaction occurs.
Q4. Is accrual basis of accounting a basis for accounting function?
Ans: Yes, accrual basis of accounting is a basis for accounting function
Q5. Write the features of accrual basis of accounting?
Ans: Following are the features of accrual basis of accounting:
1. It is a basis for the accounting work/function.
2. It records the transactions as when they occur.
3. It helps the management in preparing financial reports.
4. It tells when to record the transactions in the books.
5. It records all the economic transactions, whether cash or credit.
6. It is recognized by various bodies, principles, standards, organizations, etc.
