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 ?
(1) Financing of benefits for military and civilian personnel on an accrual basis: Most federal retirement benefits, including benefits for uniformed military personnel and DOD civilian personnel, have long been funded on the basis of "accrual accounting," in which the cost of future benefits for current employees is charged to the employing agency as the benefits are accrued.
Ha3: The use of cash flow data in conjunction with accrual accounting data, in the form of financial ratio models, can improve the overall classification accuracy of accrual accounting models to predict bankruptcy.
It's hard to picture accountants as bomb-throwers, but the GASB manifesto, which includes a call for accrual accounting, could have radical implications for the federal government.
Accrual accounting attributes revenue to the year it is earned, regardless of when it is received, and expenses to the year incurred, even if some bills are partially or wholly deferred.
State-of-the-art central government accrual accounting implementation reflects the resultant factor of such political compromises, cultural backgrounds (Hyndman & Connolly, 2011; Lapsley, Mussari, & Paulsson, 2009), economic structures, and characteristics of business infrastructure (Pina & Torres, 2003).
This regulation provided a transition period for the application of accrual accounting based on the SAP of not more than four years before the budgeting process of 2010.
In fact, "GAAP budgeting" helps explain how government officials can regularly claim to balance their budgets, even while spending regularly runs ahead of revenue in their accrual accounting results.
Under GAAP, the matching principle, which is one of the most basic and utilized guidelines of accounting, specifies that accrual accounting be used.
Accrual accounting, which is closely related to public-sector accounting reforms, has been studied in various contexts from various perspectives (Pallot, 1994; Shand, 1990; English, Guthrie, & Carlin, 2000; Ryan, 1998; Carnegie & Wolnizer, 1995; Barton, 1999; Carnegie & Wolnizer, 1999; Salinas, 2002; Carlin, 2005).
This is the first edition of Implementation of IPSAS and Path to Accrual Accounting.
In fact, out of the 22 Arab League member states, five governments are currently implementing accrual accounting IPSAS, transitioning from cash / modified cash accounting basis.