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Accrual concept

This concept is also known as the accrual theory of accounting or accrual


accounting. This concept applies equally to revenues and expenses. In the
accrual basis of accounting Revenue is recognized when it is realized, that is,
when the sale is complete or not.
Similarly, the expenses are recognized in the accounting period in which they
assist in earning the Revenues, whether the cash has been paid for them or
not. Recognition of revenues and expenses for the income determination,
therefore, does not depend upon the time when the cash is actually received
for expenses or paid for expenses.
The essence of revenue is that a mere promise on the part of a customer to
pay the money for the sale or service or Interest, Commission, Rent etc. in
future is considered as Revenue. Similarly, a promise on the part of the
business entity to make payment for salaries, rent etc. ion future is
considered as an Expense. Income (excess of Revenue or Expenses) is
associated with the change in the owners equity and that is not necessarily
related to changes in cash.
Example
A business entity may sell goods for $20000 on December 25, 2004 and the
payment is not received until January 25, 2005. The sale of goods would
result in an increase in the assets (debtors) of the firm of $20000 and
increase in the capital by the same amount (of course to be reduced by the
cost of the goods sold) although no cash has been received. However, when
the Cash is received on January 25, 2005, this would not result in Revenue. It
would result in increase in one asset (cash) and a decrease in another asset
(debtors). Similarly expenses and cash payments are not the same because
a distinction is made between Capital and Revenue Expenditures.
Other Examples of Cash Payments which are not expenses include purchase
of a machine for cash (an increase in one asset - machine and a decrease in
the other asset - cash), the payment of creditors and so on.
Thus, we can say that the accrual concept makes the distinction between the
receipts of cash and the right to receive the cash and the payment of cash
and legal obligations to receive cash, because in practice there is usually no
coincide3nce in time between cash movements and legal obligations which
they relate.
The justification for the accrual concept is that earning of revenue and
consumption of a resource (expenses) can be accurately related to particular

or specific accounting period. This would enable the measurement of Income


of matching expenses and revenue. The drawbacks include:i. The apportion of expenses to different time periods is a time consuming
process and
ii. Financial statements become more complex for the layman who may find
it difficult to understand the difference between the actual receipt of cash
and the right to receive the cash and also the actual payments and the
obligation to pay. In other words the inclusion of prepayments and inclusions
in the Balance Sheet may not be understood easily

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