Define Accrual Concept Accounting - GAAP
Here we define Accrual Concept with example
that is a very important concept of Accounting Concepts and it is named as Accrual
Concept Accounting and this concept is also laid down under the Generally
Accepted Accounting Principles (GAAP).It states that in calculating or computing Accounting Profit, revenue earned must be matched against all the expenses incurred in earning that revenue.
For Example all of the cost of sales incurred
to generate sales must be matched with that sales revenue of the goods sold
eventhough we have unsold goods at the end of the period. You can Lean this
example in a better way in this Accruals Vs Cash Basis of Accounting.
We account for all those Business Transactions that are either accrued or
prepaid, either these types of transactions paid in advance or these are
outstanding at the end of Accounting Period of the company businesses. We are
not considered the Cash Basis of Accounting where business transactions are
recorded only when cash is received or paid.
The most important example of this concept is
that when salaries are paid to employees on the accrual basis at the end of the
month and not paid advance. After rendering their services to the small
business or larger business organizations, salaries are paid to them.
The system follows small business as well
large business companies. This system of accounting helps in accurate double
entry bookkeeping of the company businesses.
In case of magazines publishers, they sell advance
subscriptions of their publications and at the end of accounting period, they
make Adjusting Entries of their subscription received in advance with
the current’s period.
So, we can say that Accrual Concept plays an important
role in recording business transactions and provide accurate and give true and
fair view of financial statements of Sole Proprietorship, Small Business or
Small and Medium Entrepreneurship or Larger Companies or Corporate Companies.
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