An Understanding of the Concept of the Accrual Accounting
Accrual accounting is the form of accounting that measures the performance as well as the position of the company by identifying the economic events regardless of when cash transaction takes place. The matching principle behind this method is the recognition of the events by matching the revenues to the expenses at the time when the transaction occurs rather than when the payment is made (received). The method generally allows for the combination of the current cash flow with the future but definite cash flow to get a correct picture of the exact financial position of the company. Almost all the companies follow the method of the accrual accounting rather than the cash accounting, apart from a few small companies.
Accrual accounting can give a more accurate picture of the company’s financial standing rather than the cash accounting but the complexities that are generally involved in the method makes it quite difficult to follow. The need for the accrual accounting arose because the businesses over the period of time have become a lot more complex as well as complicated. In these times when the selling is also done on the basis of credit and a company might be generating revenues over a period of time, it became necessary to have an accounting system that would reflect the true financial standing of the businesses.
The other method of accounting that is used by the businesses is the cash method. In this method the income is generated when the cash exchanges hands. For instance, if an item is bought on a credit card then the two methods would view the event in different lights. The cash method would consider and recognize the method when the cash is actually transferred into the bank account of the company whereas the accrual method would immediately consider the event at the time the ownership exchanges hands and would put the entry into the accounts receivable section.