Question

Explain the term accrual accounting and how it is used in governmental, not for profit and business enterprises.

Answer 1

Accrual Accounting is that method of accounting where the transaction are recorded in the books of accounts as they occur even the payment of the transaction has not been made or received. In accrual based accounting cash is not involved or simply transaction are recoreded when it occurs not when the payment made or received.  

Let's know through a example  

A XYZ ltd company sales goods $4000 to ABC company on credit basis so the revenue was recorded on the books when the event occur not when the payment received.

Goverment uses modified accrual accounting where both cash or accrual accounting comes or it is combination of both the method of accounting. The cash method recognize the transaction upon the exchange of cash expense are not recognized until they are paid and income are not recognized until payment is not received. And in accrual method expenses recognize when they occur regardless the payment status and revenue is earned when it is earned not when it is received.

Accrual accounting for not for profit organisation , if you have a very small nonprofit and all of your income is cash donation and all payments are cash payments, there is no practical difference between the two accounting methods. As your nonprofit grows, you probably will not be able to pay bills in cash and your income may be invoiced. At that time, you will want to use accrual accounting.

Accrual accounting helps to business owners to find if the company profitable, where the profit is coming from and where expenses are going. As there is no major role of cash so It also help to asses income and debt of the compny accurately. In USA companies with $5 million dollar in annual sales or $1 million dollar annual inventory sales are legally required to use accrual base accounting. I