| Considering basic accounting principles we can | | | | impact on the moment when sale is recognized. |
| determine them as the main rules how the books | | | | Of course it might happen that the customer will |
| of any business must be kept and how the | | | | fail to pay for the goods acquired. If this will |
| financial statements must be prepared. These | | | | happen still the company will have to account for |
| rules are needed to ensure that it is possible to | | | | sales revenue and in addition will have to |
| compare financial statements and accounting | | | | recognize loss caused by the customer failing to |
| information of different businesses and also of the | | | | pay for the goods. |
| same business for the different periods of time. | | | | Expenses |
| One of the main basic accounting principles is | | | | The same principle as for revenue accrual |
| accrual basis or accrual accounting. | | | | accounting is applied for expenses accrual |
| Accrual Accounting - Essence And Examples | | | | accounting. Assume that we have a company, |
| According to the accrual basis revenues are | | | | which rents office space and is liable to pay rent |
| recognized in that accounting period when they | | | | and utility expenses related to the space rented. |
| were earned and expenses are recognized in that | | | | The payment must be done within 10 days after |
| accounting period when they were incurred | | | | the end of the rent month, i.e. for September |
| despite the time cash related to such revenues or | | | | rent and utilities the company will be paying until |
| expenses was received or paid. Such definitions | | | | October 10. If the rent and utility expenses for |
| might sound quite complicated, therefore let us | | | | month amount to $700, in September the |
| explore some practical examples for better | | | | company will to recognize $700 administrative |
| understanding. | | | | expenses according to the accrual accounting |
| Revenues | | | | despite the fact that payment for these |
| Assume that we have a company which sells | | | | expenses will be done only the next month. |
| chairs to its clients and clients are allowed to pay | | | | Why Is It Necessary? |
| for the chairs within 30 days after the sale was | | | | So why accrual accounting is so important? This |
| made. On September 15 the company sells chairs | | | | principle allows to reflect revenue, accounts |
| for $670 and the chairs were delivered to the | | | | receivable, expenses and accounts payable |
| customer on the same day, i.e. the customer got | | | | properly and financial statement will indicate actual |
| the ownership title to the goods on September | | | | amounts the company can claim from its |
| 15. Company will get cash for the goods sold | | | | customers for the goods sold or services |
| within 30 days from the sale date, i.e. the | | | | provided and also financial statements will indicate |
| customer will have to pay for the chairs until | | | | the actual amounts the company is liable to pay |
| October 15. | | | | its suppliers for goods or services acquired. If we |
| According to the accrual accounting revenue for | | | | account for revenue or expenses only when cash |
| the sale of chairs has to be recognized on | | | | is received or paid, financial statements will not |
| September 15, since on that day actual sale | | | | reflect all the receivables from customers and we |
| occurred, the company transferred ownership title | | | | will never see how many customers were bad |
| for the chairs to the customer and this fact allow | | | | and failed to pay their debts. Also financial |
| the company to claim the payment for the goods | | | | statements will not reflect actual liability of the |
| sold. According to accrual basis the fact that cash | | | | company to the suppliers. |
| will be received later after the sale does have an | | | | |