Accrual Principle of Accounting

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 20, 2023

Accrual Principle of Accounting: Definition

The accrual principle is often confused with—or treated as only an aspect of—the matching principle.

This principle, in fact, relates to expenses that are not specifically related to the source of revenue, but which are incurred by the business for its existence or general conduct.

Accrual Principle of Accounting: Explanation

The accrual principle states:

"If an expense has been incurred in a particular accounting period (i.e., if the benefit against it has been received), it should be included as an expense in the period's income statement, whether or not it has been paid for."

To illustrate, consider an example: when a business sells any goods, the cost of the specific goods must be matched—this is part of the matching principle.

In addition to the purchase of these goods, the business also incurs certain other expenses that are not specifically related to these goods, such as telephone expenses.

Since the income statement is based on a specific accounting period, the cost of all phone calls made in that period must be classified as an expense for the same period, even if the telephone bill is received and paid for in the next accounting period.

The crucial point to remember is this: the test is the time when the service or benefit against the expense is received, not when it is paid for.

Example

Let's consider an extreme example and assume that a business records no sales in a particular month.

The business will, therefore, have no revenue for that month and no direct costs. However, certain expenses will still be incurred in that month that are not directly related to sales (e.g., rent).

Some of these indirect expenses may not have been paid by the end of that month, despite being accrued in that period.

The accrual principle states that an expense should be booked when it has taken place regardless of whether it has been paid or not, and regardless of its direct or indirect relationship to revenue.

Similarly, if an income is time-related and that time has passed (e.g., interest on a bank deposit), it should be recorded in the accounts even if it hasn't been received in the corresponding accounting period.

Accrual Principle of Accounting FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.