Accrual Accounting Concept

Accrual Accounting Concept
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Accrual Accounting Concept

What is Accounting Concepts?

It is the basic rules, ideas, and conditions by which companies record their financial transactions and organize their bookkeeping.

What is the objective of Accounting Concepts?

To achieve the uniformity and consistency in preparing and recording financial reports.

What is the importance of accounting concepts?

• Serves as a uniform set of rules for each step in recording a financial transaction of a company.

• Provides quality management reports and financial statements.

• Helps users to make financial decision by making the reports reliable, relevance, understandable and comparable.

The 5 commonly used accounting concepts:

• Accrual Concept

• Consistency Concept

• Matching Concept

• Going Concern Concept

• Prudence Concept

What is Accrual Concept?

Revenue is booked when it is earned, NOT when cash is received.

Expenses are recorded when they are incurred, NOT when cash is paid out. Accruals can be passed by journal entries at the month/year end.

Example 1:

Goods delivered on 25 May 2023 and Sales Invoice of RM 1,000 issued on 26 May 2023, but money received from customer on 10 June 2023.

To recognize sales on 26 May 2023:

DR Accounts Receivables RM 1,000

(Balance Sheet)

CR Sales RM 1,000

(Income Statement)

Example 2:

Salary of RM 3,000 incurred in May 2023 but payment to staff only made in early June 2023.

To record expenses on 31 May 2023:

DR Salaries RM 3,000

(Income Statement)

CR Accruals RM 3,000

(Balance Sheet)

More accounting concepts to be continued in the next posting…

 

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