The accrual basis of accounting is convention the lly used by companies in several sectors to record their financial transactions. at the point when they occur regardless of whether a cash transfer has been made. It is unlike cash accounting in which transaction is deemed as valid for recording when cash is actually received or paid. Accrual concept of accounting requires that financial statements reflect transactions at the time when they actually occur, not necessarily when cash changes the hands. This basis of accounting is generally used in preparing financial statements except for cash flow statement. Revenue is recorded when it is earned regardless of when it is received and expenses are recorded when they are incurred, regardless of when they are paid.
- Under accrual concept of accounting, financial statements reflect all the expenses associated with the reported revenues for an accounting period. The usability of financial information is thus increased.
- It satisfies the requirements of major accounting standards applicable in the world such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
- It is considered one of the general assumptions while interpreting financial statements by various users.
- The departure from accrual concept ceases the ability of the users to compare the financial statements of an entity with that of others which ultimately results in less lucrative from investors’ point of view.
- It makes financial information more accurate and more reliable.