accrual

(noun)

A charge incurred in one accounting period that has not been paid by the end of it.

Related Terms

  • indirect method
  • conservatism
  • FOB
  • materiality
  • generally accepted accounting principles
  • income statement

Examples of accrual in the following topics:

  • Differences Between Accrual-Basis and Cash-Basis Accounting

    • Accrual accounting does not record revenues and expenses based on the exchange of cash, while the cash-basis method does.
    • Under the accrual accounting method, the receipt of cash is not considered when recording revenue; however, in most cases, goods must be transferred to the buyer in order to recognize earnings on the sale.
    • An accrual journal entry is made to record the revenue on the transferred goods even if payment has not been made.
    • In this case, an accrual entry for revenue on the sale is not made until the goods are delivered or are in transit.
    • The cash-basis method, unlike the accrual method, relies on the receipt and payment of cash to recognize revenues and expenses.
  • Terminology of Accounting

    • Important terminology in accounting includes cash vs. accrual basis, assets, liabilities, and equity.
    • There are two primary accounting methods - cash basis and accrual basis.
    • In contrast, the accrual method records income items when they are earned and records deductions when expenses are incurred, regardless of the flow of cash.
    • Accrual accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.
    • The term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue.
  • Expense Recognition

    • Most financial reporting in the US is based on accrual basis accounting.
    • Under the accrual system, an expense is not recognized until it is incurred.
  • Importance of Recognition and Measurement

    • The revenue recognition principle and the matching principle are two cornerstones of accrual accounting.
    • According to the matching principle in accrual accounting, expenses are recognized when obligations are incurred—regardless of when cash is paid out.
    • The matching principle is a culmination of accrual accounting and the revenue recognition principle.
  • Impact of the Operating Cycle on the Income Statement

    • The accrual method ensures proper reporting on the income statement because the operating cycle doesn't coincide with the accounting cycle.
    • To allow for the fluctuations in the operating cycle, many companies choose to use the accrual basis of accounting.
    • In accrual accounting, companies recognize revenues when the company makes a sale or performs a service, regardless of when the company receives the cash.
  • Approaches to Assessing Risk

    • From the average cost per employee over time, or cost accrual ratio, a project manager can estimate: the cost associated with the risk, if it arises, estimated by multiplying employee costs per unit time by the estimated time lost (cost impact, C where C = cost accrual ratio * S), the probable increase in time associated with a risk (schedule variance due to risk, Rs where Rs = Probability * S).
    • The probable increase in cost associated with a risk (cost variance due to risk, Rc where Rc = P*C = P*Cost Accrual Ratio*S = P*S*CAR): sorting on this value puts the highest risks to the budget first, which can raise concerns about schedule variance.
  • Defining the Income Statement

    • In addition to the Single and Multi-step methods, the income statement can be reported on a cash or accrual basis.
    • Larger entities use the accrual basis, which is also the recommended method by the FASB.
    • An income statement under accrual accounting reflects revenues "earned", where an exchange in value among the parties has taken place, regardless of whether cash was received.
  • Limitations of the Statement of Cash Flows

    • These two financial statements reflect the accrual basis accounting used by firms to match revenues to the expenses associated with generating those revenues.
    • As a cash flow statement is based on the cash basis of accounting, it ignores the basic accounting concept of accrual.
  • Recognition of Revenue Prior to Delivery

    • Accrual accounting allows some revenue recognition methods that recognize revenue prior to delivery or sale of goods.
  • Current Guidelines for Revenue Recognition

    • The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle.
    • For companies that don't follow accrual accounting and use the cash-basis instead, revenue is only recognized when cash is received .
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