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Accrual Accounting |
Also found in: Wikipedia | 0.01 sec. |
Accrual Accounting A system of accounting that recognizes revenue and matches it with the expenses that generated that revenue. Unlike other systems of accounting, which recognize revenue and expenses in the order in which they are received, the accrual accounting convention ignores the function of time and only considers what expenses generate what revenues, even if payments have not actually been made. Companies with inventories are required to use the accrual method for tax purposes. Accrual Accounting What Does Accrual Accounting Mean? An accounting method that measures the performance and status of a company regardless of when cash transactions occur; financial transactions and events are recognized by matching revenues to expenses (the matching principle) at the time when the transaction occurs rather than when payment actually is made (or received). This allows current cash inflows and outflows to be combined with expected future cash inflows and outflows to provide a more accurate picture of a company's current financial condition. Accrual accounting is the standard accounting practice for most big companies; however, its relative complexity makes it more expensive to implement for small companies. This is the opposite of cash accounting, which recognizes transactions only when there is an exchange of cash. Investopedia explains Accrual Accounting The need for this method arose because of the complexity of business transactions and the need for more accurate financial information. Selling on credit and projects that provide future revenue streams affect a company's financial condition when they occur. Therefore, it makes sense to reflect those events during the same reporting period in which the transactions occur. For example, when a company sells a television to a customer on credit, the cash and accrual methods view this transaction differently. The cash method does not recognize the sale until actual cash is received, which could be a month or longer. Accrual accounting, in contrast, recognizes that the company will receive the cash at some point in the future. Therefore, even though the cash has not been collected yet, the sale is booked to “accounts receivable” and thus sales revenue. Related Terms: How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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D & O risk assessment resources available to both underwriters
and insurance buyers include such things as corporate governance scoring
systems and accrual accounting metrics that tie accounting practices to
the probability of being the target of a securities class action suit. Using accrual accounting principles, a fund calculates daily its
expenses, the value of investments held in its portfolio and the number
of fund shares outstanding. Under the accrual accounting method, income is includible in gross
income when all the events have occurred that fix the right to receive
such income and the amount thereof can be determined with reasonable
accuracy; see Anderson, 269 US 422 (1926), and Regs. |
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