Accrual Concept

ACCRUALS CONCEPT

• The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

ILLUSTRATION NO.1

Company A has received cash of $40,000 from his customers. However, the company actually has done all work satisfactorily and the customers have acknowledged the work done which the company can billed for another $20,000. Furthermore, the expenses for the $20,000 work-done has been taken up into the books of account.

Question:    Should the company just close their accounting book by presently its income as $40,000 for the cash received or should it be $40,000+$20,000 =$60,000

Answer:     Based on this concept, the company has actually completed all work done, also, the work done have being acknowledged by the customers, hence income of $60,000 should be taken up and not just the cash received.

ILLUSTRATION NO.2

Company A has billed customers for $100,000. Total supplier bills paid was $50,000 but there are some suppliers bills not paid amounting to another $15,000

Question:    The company’s income is undisputed by $100,000 but what should its book show for expenses-is it only $50,000 being invoices paid or is it all inclusive of the other $15,000

Answer:       As the total supplier bills should be $50,000+$15,000=$65,000, the company should based on this concept to accrue for the balance of the bills not being paid.