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: Under accrual basis of accounting, the revenue and expenses are recorded at the time of occurrence not at the time of cash receipt or payment. The revenue should be recognized when the goods or services are transferred or rendered to the customer and the expenses should be recorded when the company has incurred the expense and is liable for the payment. Therefore, revenue and expenses are recorded at the time of their occurrence.

Example:

Company A sold goods on 1 December on credit. It received the cash payment on 15 December. The company should record the sale of the goods (revenue) when the goods are sold and the ownership is transferred to customer which is 1 December. The event occurred on 1 December.

Company A purchases goods on 15 November on credit but it paid the supplier on 29 December. The company should record the purchase of goods on 15 December as the company received the goods on 15 November and is liable for the payment on or from 15 November. The event occurred on 15 November.

Please take your valuable time and rate the solution as per your convenience.