🔹 Accrual Basis of Accounting

✅ Definition:

Accrual basis of accounting is a method where:

• Revenues are recorded when they are earned, not when cash is received.

• Expenses are recorded when they are incurred, not when cash is paid.

This means accounting is based on the actual business activity, not just the movement of cash.

🔹 Key Features

1. Matches income with related expenses (called the Matching Principle).

2. Provides a true and fair view of financial performance.

3. Required by most accounting standards like IFRS and GAAP.

🔹 Example

• Suppose you sell goods worth $1,000 on credit in January (customer will pay in February).

  • Under Accrual Basis → You record $1,000 Revenue in January (when earned).

  • Under Cash Basis → You record $1,000 Revenue in February (when cash received).

• Similarly, if you receive an electricity bill of $200 in March, payable in April:

  • Under Accrual Basis → Record Expense in March (when consumed).

  • Under Cash Basis → Record Expense in April (when paid).

🔹 Why Important?

• Shows the real performance of a business in a period.

• Avoids misleading profits/losses due to timing of cash flows.

✅ In short:
Accrual basis = Record income when earned & expenses when incurred, regardless of cash.