Accrual Accounting

Accrual accounting is a technique that records revenues and expenses in the year they occur, rather than when payment is made.


What Is Accrual Accounting?

Accrual accounting is a method in which a transaction – both revenue and expense – should be recorded when it occurs even if the cash hasn’t been received/paid. It means that revenue should be recorded when the goods or services are delivered even if the customer has not paid yet. It is done with the assumption that the customer will pay in the near future, and is recorded as an asset until the customer pays. Expenses are also recorded in the same way, which means that if the business consumes any good or service on an accrual basis, the business must record the transaction at the date of the purchase and not on the date of the payment. This is done due to the accounting concept of accruals as the transaction was carried out for the period when it occurred and not when the payment does, this results in the accounts representing an accurate and fair view.

What Is an Accrued Revenue?

Accrued revenue is commonly recorded when a customer makes a purchase and pays for the same on a later date. The accountant makes a debit entry in the receivables account on the date at which the goods or services are provided. In contrast, the sales account is credited. On the date when the payment is received, the accountant debits cash/bank account and credits the sales receivables account. 

What Is an Accrued Expense?

An accrued expense usually occurs when a business purchases raw materials for the production of its goods on a credit basis. This is when the business receives the product before the payment. 

On the day the raw materials are received, the business credits the trade payables account and debits the purchases account. When it pays for the raw materials, the trade payables account is debited to reduce the balance and the bank/cash account is credited.