Accrual principle

Definition and Explanation

The accrual principle is often confused with or treated as being only an aspect of the matching principle. It is actually not so. This principle, in fact, relates to such expenses that are not specifically related to the source of a revenue but are incurred by the business for its existence or general conduct.

Accrual principle states that if an expense has been incurred (i.e., the benefit against it has been received) in a particular accounting period, it should be included as an expense in that period’s income statement whether or not such an expense has been paid for. Let us consider an example. When a business sells any goods, the cost of such specific goods must be matched – that is a part of matching principle.

In addition to purchase of these goods, the business also incurs certain other expenses that are not specifically related to these goods, e.g. telephone expenses etc. Now since income statement is based on an accounting period, the cost of all telephone calls made in a particular accounting period must be considered as an expense for that period, even if the telephone bill is received and paid for in the next accounting period. The test is the time when the service or benefit against the expense is received, not when it is paid for.

Example

Let us take an extreme example and assume that a business records no sales whatsoever in a particular month. It will, therefore, have no revenue for that month and no direct costs, but there will still be certain expenses incurred in that month that are not directly related to sales, e.g. rent etc. Some of these indirect expenses may no have been paid by the end of that month even though they have 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 the revenue. Similarly, if an income is time-related and that time has passed (e.g. interest on a bank deposit) such an income should be booked in the accounts even if it has actually not been received in the particular accounting period.

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