Basic Accounting Principles - peek Accrual Accounting

Considering basic accounting principles we can settle them as the main rules how the books of any business must be kept and how the financial statements must be prepared. These rules are needed to ensure that it is possible to compare financial statements and accounting information of different businesses and also of the same business for the different periods of time. One of the main basic accounting principles is accrual basis or accrual accounting.



Accrual Accounting - Essence And Examples



According to the accrual basis revenues are recognized in that accounting period when they were earned and expenses are recognized in that accounting period when they were incurred despite the time cash related to such revenues or expenses was received or paid. Such definitions might sound quite complicated, therefore let us observe some practical examples for better notion.



Revenues



engage that we have a company which sells chairs to its clients and clients are allowed to pay for the chairs within 30 days after the sale was made. On September 15 the company sells chairs for $670 and the chairs were delivered to the customer on the same day, i.e. the customer got the ownership title to the goods on September 15. Company will obtain cash for the goods sold within 30 days from the sale date, i.e. the customer will have to pay for the chairs until October 15.



According to the accrual accounting revenue for the sale of chairs has to be recognized on September 15, since on that day real sale occurred, the company transferred ownership title for the chairs to the customer and this fact allow the company to claim the payment for the goods sold. According to accrual basis the fact that cash will be received later after the sale does have an impact on the moment when sale is recognized. Of course it might happen that the customer will fail to pay for the goods acquired. If this will happen peaceful the company will have to yarn for sales revenue and in addition will have to notice loss caused by the customer failing to pay for the goods.



Expenses



The same principle as for revenue accrual accounting is applied for expenses accrual accounting. seize that we have a company, which rents office area and is liable to pay rent and utility expenses related to the set rented. The payment must be done within 10 days after the ruin of the rent month, i.e. for September rent and utilities the company will be paying until October 10. If the rent and utility expenses for month amount to $700, in September the company will to stare $700 administrative expenses according to the accrual accounting despite the fact that payment for these expenses will be done only the next month.



Why Is It principal?



So why accrual accounting is so primary? This principle allows to mediate revenue, accounts receivable, expenses and accounts payable properly and financial statement will point to proper amounts the company can claim from its customers for the goods sold or services provided and also financial statements will show the accurate amounts the company is liable to pay its suppliers for goods or services acquired. If we chronicle for revenue or expenses only when cash is received or paid, financial statements will not mediate all the receivables from customers and we will never gape how many customers were dreadful and failed to pay their debts. Also financial statements will not believe accurate liability of the company to the suppliers.