Accrual concept is the most essentially principle of accounting which demands recording revenues when they are earned and not when the cash is received in, and recording expenses when they are incurred and not when the cash is paid.

Revenues and costs are not calculated on the basis of cash received or paid. Revenues are recognized when they are earned, usually at the date of transaction with a third-party. Against such revenues are charged, not the expenditures of a particular period, but the costs of earning the revenue which has been recognized.

Examples

 

The following examples explain the accrual concept.

1. An airline company when sells ticks before the flight date, it records this transaction following accrual concept.

Bank                                     $2000

Unearned revenue              $2000

Unearned revenue is a current liability which eliminates when the flight is made.

Unearned revenue     $2000

Revenue                     $2000

2. A company acquire its office on rent and paid $20,000 on 1st March as annual rent. The company will record this payment as a prepaid rent instead of expense.

Prepaid rent              $20000

            Bank                          $20000

At the end of the period it will recognize this prepayment as rent expense as follows.

Rent expense          $20000

           Prepaid rent             $20000