Question

What is the accrual basis of accounting? When should revenue and expense be recognized in the accrual basis? Provide an example.

Answer 1

Accrual basis of accounting

Accrual basis of accounting is the fundamental accounting concept and principle based on which business transactions are recorded in books of account. As per this principle the income and expenses should be accounted when they are earned and incurred respectively. In other words income and expense should not be accounted based on cash that is when cash is received and paid.

Example: revenue should be recognised when service is performed even though cash is not received for the same. Any advance payment received from supplier should be accounted as unearned revenue and should be recognised as income only when performance obligation is met.

Expense should be accounted when they are incurred. For example: if bills are received end of the month payables should be provided even though cash payment is not made.