Accrual concept of accounting

By: Rashid Javed | Updated on: October 20th, 2021


The accrual accounting is a system used by companies to record their financial transactions at the point when they occur regardless of whether a cash transfer has been made. It is unlike cash accounting in which transaction is deemed as valid for recording when cash is actually received or paid.

Accrual concept of accounting requires that financial statements reflect transactions at the time when they actually occur, not necessarily when cash changes the hands. This basis of accounting is generally used in preparing financial statements except for cash flow statement. Revenue is recorded when it is earned regardless of when it is received and expenses are recorded when they are incurred, regardless of when they are paid.



Suppose John rents a house from Sam at $100,000 per year. Now consider the following three cases in which John pays cash to Sam and records rent expense.


In above example, even though cash paid is different in all the three cases but the rent expense recorded is $100,000 in each case. Justification behind that is the accrual concept of accounting in which expenses must be recorded in the accounting period in which they are incurred not in the period in which they are paid.

Notice that in case “b” John has paid $80,000 cash but has recorded $100,000 expense during the period because the annual rent is $100,000 not $80,000. The remaining $20,000 will be paid subsequently. Also notice that in case “c” John has paid $150,000 but has recorded $100,000 expense, the balance of $50,000 will be adjusted against the rent of subsequent period.

The acrual concept of accounting may be complex for some people but has many benefits. It is also one of the basic requirements of major accounting frameworks like US-GAAP and IFRS.

Benefits and importance of the accrual approach:

  1. Under accrual concept of accounting, financial statements reflect all the expenses associated with the reported revenues for an accounting period. The usability of financial information is thus increased.
  2. It satisfies the requirements of major accounting standards applicable in the world such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
  3. It is considered one of the general assumptions while interpreting financial statements by various users.
  4. The departure from accrual concept ceases the ability of the users to compare the financial statements of an entity with that of others which ultimately results in less lucrative from investors’ point of view.
  5. It makes financial information more accurate and more reliable.
13 Comments on Accrual concept of accounting
  1. Susan Nshimba

    very easy to understand and straight to the point in sample teams. Thank you so much for making understand.

  2. Accounts Confidant

    Each step wise guidance is very helpful. Please brief me about bookkeeping services. Thanks

    1. Muhammad Riaz

      very simple when a client come on 1st may and give me oder by saying that i have need 200 chaires on 5 may and i give u payment on 10 may keep in mind that he came on 1st may and i delivered chaires on 5 may when i delivered chaires on 5 may my assets will be increase whatsever he did,t give me payment in accnting concept my assets is automatically increase when i delivered chaires and he pay me payment on 10 may cash in hand or through any bank .If i make any mistake at anywhere i want to be extremly sorry beacuse i,am also student of

      1. Juan lopez

        The day your delivered the chairs you need to debit accounts receivable for total amount that it is supposed to be paid to you and credit sale revenue for the same amount.

  3. S Mafu

    Thanks for clear explanations!

  4. Tasara Conwell


  5. Charles W Bush

    Thank you very much for the great exercises that u are doing in improving the study experience of many professionals.
    I really appreciate.

  6. Hussain

    The accrual :
    Yet to be paid is $20,000, when John pay $80,000
    The accrual :
    Yet to be received is $50,000, when John pay $150,000

    Many thanks!

  7. Robinah Nabitalo

    Thanks alot for the clear expalanation


    Thanks for your wonderful explanation

  9. Butholezwe Masuku

    I was struggling to understand this concept, but the given explanation was very easy to understand. Thank you, I will keep in using your site and quite possibly recommend it.

  10. Ataenyong

    Thanks you very much

  11. Teh linda

    Thanks you very much

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