Question

Explain how commitments and guarantees are accounted for under accrual accounting.

Answer 1

Accrual Accounting is a basis of accounting under which the transactions are recorded at the time of when the transaction become due. It records the transaction of expenses, losses, gains and revenue at the time when they are recognised. It shows the correct financial position by showing all surplus and deficit, and record all expenses wheather they are paid or not.

Commitments and Guarantees are the backbone of accrual accounting because it is solely based on the transactions which become due. So the commitment is a promise of paying a certain amount in the future which has to be recorded in the books of accounts, which effects the liability of business. And the guaranteed transactions records all the expense or revenue which are certain or guaranteed. Guarantees are important because it shows that the payment will definitely receive in the future. So commitment and guarantees are two crucial parts of accrual accounting in which one shows promise of payment and other shows the certainity of payment.