UK Accounting Glossary
The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate (see also matching).
In the context of accounting, practice in which expenses and income are accounted for as if they are earned or incurred, whether or not they have been received or paid. The antithesis of cash basis accounting.
Accrual basis accounting is a system of accounting that matches revenues and expenses, respectively, to the period they were earned and incurred. Under accrual basis accounting, revenue is recorded when product is shipped or services provided. Similarly, accrual basis accounting requires expenses be recorded in the period in which the related revenues were recognized. Accrual basis accounting differs from cash basis accounting, where revenue and expense are recorded when cash is received or paid. Here’s an example of accrual basis accounting: suppose a company sells and ships widgets to a customer for $500 in year 1. The customer pays $200 in year 1 and $300 in year 2. Under accrual basis accounting, the entire $500 would be reported as revenue in year 1, even though $300 wasn’t received until year 2. Under accrual basis accounting, the company recognizes revenue when it has substantially fulfilled its obligations to the customer. Because accrual basis accounting requires allocating revenue and expense to different time periods, it is subject to both error and abuse. Nevertheless, only accrual basis accounting meets generally accepted accounting principles.
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This glossary post was last updated: 23rd December 2018.