Sunday, April 19, 2009

Accrual Basis of Accounting

One method which is available to accountants for keeping record of business transactions is called the Accrual Basis of Accounting. Accrual method of record-keeping means that the items are recorded in the books of accounts based on the Matching Principle.

Matching Principle means that an item which relates to the Year 2000, is recorded in the books of accounts related to that period. For example, if during the Year 2000 the company pays insurance premium for the coming year then although it will be recorded in the books but not exactly as an expense. Rather it is a prepaid expense, which relates to the coming year.

Hence, Accrual method means that any income which has been earned but which has perhaps not been collected, is recorded as an earning.



In the above shown entry of sales, the income comprises of two parts i.e. the cash part and the one which is based on credit. This part is still collectible and the company's books will continue to show Debtors worth 500 against this income.
But because the books are being maintained on Accrual basis, so the entire sales of 1,500 is recorded. In an alternative method of record-keeping the treatment will differ. That method is known as the Cash Based System of Accounting.

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