# Simple Explanation of Accrual Basis Accounting

## Definition

Accrual basis is the accounting method that recognizes and records revenues and expenses in the period they occur. It is different from cash basis which revenues are only recorded when cash is received and, expenses are recorded when cash is paid.

## Accrual Basis for Revenues

In the accrual basis, a company recognizes revenues when goods are delivered or services are provided regardless of when the company will receive the payment. That is why there usually is account receivable on the balance sheet in the company that uses accrual basis.

### Accrual Basis for Revenues Example

On 22 December 2018 ABC Co. sold \$500 goods on credit to one of its customers. The goods cost \$300 in the inventory.

The accounting entry of the transaction on 22 December 2018 was:

Account Debit Credit
Accounts receivable 500
Sales 500
Cost of goods sold 300
Inventory 300

In the example above, there was no cash transaction involved; however, in accrual basis, ABC Co still recorded sales as it occurred and in the period it occurred.

## Accrual Basis for Expenses

In accrual basis, the company recognizes expenses when it receives goods or services from its suppliers regardless of when the company made the payment to the suppliers. That is why there usually is account payable on the balance sheet in the company that uses accrual basis.

### Accrual Basis for Expenses Example

On 19 December 2018 ABC Co. bought \$150 office supplies on credit from one of its suppliers.

The accounting entry of the transaction on 19 December 2018 was:

Account Debit Credit
Office supplies expense 150
Accounts payable 150

In the example above, there was no cash transaction involved; however, in accrual basis, ABC Co still recorded expense as it occurred and in the period it occurred.

## Benefits of Accrual Basis

The matching principle which records revenues and all related expenses in the same period as they occurred only exists in the accrual basis. This is due to in the cash basis the revenues are recognized only when cash is received and the expenses are recognized only when cash is paid.

The accrual basis provides a more realistic view of the revenues and expenses that the company has than the cash basis. Therefore, it provides a better picture in evaluating the result of the company’s operation during a period of time.

In addition, only accrual basis is allowed under IFRS or US GAAP; cash basis is not allowed.

It is useful to note that on the accrual basis, the increase or decrease of cash does not necessarily determine the net income of the company.