accrual accounting

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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

A method of accounting that recognizes expenses when incurred and revenue when earned rather than when payment is made or received. Thus, it is the act of sending the goods or receiving an inventory item that is important in determining when transactions are posted on financial statements. For example, using accrual accounting, sales are recorded as revenue when goods are shipped even though payment is not expected for days, weeks, or months. Most firms use the accrual basis of accounting in recording transactions. Compare cash basis accounting.
Case Study Recording revenues that are used to calculate earnings before actually receiving those revenues can potentially misrepresent a firm's financial results and lead to financial difficulties down the road. For example, a company that ships substantial amounts of goods on credit may produce outstanding earnings in the current accounting period, but if customers who receive the goods fail to pay for the merchandise, future earnings are likely to suffer. Firms build an estimate for doubtful payments into the revenues and earnings they report, but the estimates may be understated and make earnings look better than they actually are. More than a few companies have been known to ship unusually large amounts of merchandise near the end of a fiscal year in order to make the year's sales and earnings appear favorable even though the extra sales produce an unrealistic picture of the firm's operations. In one instance, a large toy company was offering special incentives to customers that loaded up with the firm's merchandise just prior to the end of the year. This, of course, is perfectly legal. However, the company offering the incentives was accused of overstating its earnings by not properly accounting for the expense of the incentives being offered. A firm that aggressively pursues end-of-year sales may end up selling to some financially weak customers who fail to pay for the merchandise. Unfortunately, it is difficult for stockholders to know the extent to which a firm's actions serve to puff up the financial statements rather than produce real results.
References in periodicals archive ?
Finance Ministry Secretary General Ezzeddine Kanakrieh, told Petra that his ministry prepared a gradual action plan for applying IPSAS which depends on the transformation from cash basis accounting into accrual basis accounting system.
One of the recommendations of the external CPA was that OCCC should adopt an accrual basis accounting system rather than the cash system of reporting currently in use.
Categories: April 14, 2010, Accountability, Accrual basis accounting, American Recovery and Reinvestment Act (ARRA), Audits, Budget deficit, Debt held by public, Fannie Mae, Federal agencies, Financial analysis, Financial management, Financial records, Financial regulation, Financial statement audits, Financial statements, Freddie Mac, Internal controls, Intragovernmental transactions, Investments, Materiality, Medicare program, PAYGO, Reporting requirements, Social Security Program, Troubled Asset Relief Program (TARP)
According to the Government Financial Reporting Accounting Issues and Practices (2000), four specific bases of accounting have been implemented by governments of different countries: the cash basis, modified cash basis, modified accrual basis and accrual basis accounting.
GAAP is not the same as full accrual basis accounting used on a corporate tax return by a corporation that has accounts receivable, inventory and accounts payable.
Accrual basis accounting became more common and reporting issues became a top priority for the profession.
The statement requires accrual basis accounting for such benefits as opposed to the Company's previous method of cash basis accounting.
Also, conventional wisdom tells us that accrual basis accounting is vastly superior to cash basis accounting.
IPS) (OTC:IGPK), the leader in the design, development and implementation of wireless parking technology, announced today that the financial results for the past three fiscal years ended September 30, 2007 have been prepared using accrual basis accounting.
Categories: Budget and Spending, Accountability, Accounting, Accrual basis accounting, Auditing procedures, Budget deficit, Federal debt, Federal social security programs, Financial management, Financial management systems, Financial records, Financial statement audits, Financial statements, Fiscal policies, Future budget projections, Health care costs, Intergovernmental fiscal relations, Internal controls, Reporting requirements, Strategic planning, Cost analysis, Performance appraisal, Interagency relations, Government information dissemination, GAO High Risk Series
11 requires governments to use accrual basis accounting to recognize government fund revenues and expenditures.
Since requiring accrual basis accounting for postretirement benefits may have a major impact on reported expense and corresponding liability, employers may implement changes in plan design to reduce the amount of benefits promised.