Key Principles and Application of the Accrual Concept in Accounting
The Accrual or Periodicity Concept in accounting emphasises the recording of revenues earned and expenses incurred in the accounting periods, irrespective of when they are actually received or paid.
This concept is central to the mercantile system of accounting, in contrast to the cash system where entries are only made when cash is received or paid.
Accrual Concept, in essence, entails recognising revenues when they become receivable, regardless of the timing of cash receipt, and recognising expenses when they become payable, irrespective of the actual cash payment.
It distinguishes between the accrual receipt of cash and the right to receive cash for revenue, as well as the actual payment of cash and the obligation to pay cash for expenses.
The accrual concept assumes that revenue is realised at the time of the sale of goods or services, regardless of when the cash is received.
For example, if a firm sells goods on March 26, 2023, for Rs. 85000 and the payment is not received until April 14, 2023, the accrual concept dictates that the amount should be included in the revenue for the year ending March 31, 2023.
Similarly, expenses are recognised when services are received, irrespective of the actual payment timing. For instance, if a firm receives goods/ services costing Rs. 25000 on March 29, 2023, but the payment is made on April 3, 2023, the accrual concept requires recording expenses for the year ending March 31, 2023.
Significance of the Accrual Concept:
It facilitates understanding actual expenses and income during a specific time period.
It aids in calculating the net profit of the business.
In summary, The accrual concept is essential in accounting, requiring the recognition of revenue upon realization and expenses when due, irrespective of cash timing. It plays a pivotal role in accurately portraying a business's financial standing by capturing earned revenues and incurred expenses, contributing to a clearer understanding of actual income and costs. This approach aids in precise net profit calculation, emphasizing the significance of a comprehensive financial reporting system.