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 ?
Little attention has been paid to the level of municipalities' compliance with the accrual accounting regulations that have been prescribed by the Local Authorities Budget and Accounting Regulation since 2006.
The budget prepared under the accrual accounting norms will estimate the revenues and expenses of a given period in order to determine the profit that is to be achieved.
The values reported by accrual budgeting are not necessarily identical to those revealed by accrual accounting because in the former case they are recorded ex ante, whereas in accrual accounting, this recording is made ex-post.
This factor would be less important in accrual accounting terms than in cash terms, however, since only a small proportion of the total cost of projects begun late in the CFDS planning period would be deemed to be expended, and thus he counted, during that period.
Without intervention, the implementation of full accrual accounting could have resulted in the disappearance of the net debt measure, implicitly present as accumulated deficit.
These examples are simple and attempt to relate only a few of the differences between cash accounting and accrual accounting.
Only accrual accounting captures the full cost of services provided by the government, thereby supporting effective and efficient decision making.
Vasquez asked me to address was whether it was cost advantageous for OCCC to adopt accrual accounting.
Exhibit 1 outlines the principal phases in the development of modified accrual accounting.
The concepts of accrual accounting guide the vocabulary for which the firm's results are discussed.
The authors argue for accrual accounting rather cash accounting to determine budget deficits.