Accrual basis accounting

Accrual basis accounting
See also

Accrual basis accounting is one of the basis of accounting, in which the main assumption is the time when various accounting transactions regarding income or expenses are recorded. There are two main methods for recording revenues and expenses in the accounting system the cash basis and the accrual basis. Both ways can be used in a variety of situations, from the accounts of individuals or small businesses to large corporations, and even entire countries.

Accrual basis records financial transactions that relate to revenues when they are received, while transactions regarding expenses when they are incurring. It requires the use of write-offs for obsolete inventories, uncollectible debts and sales returns, for example, registering revenue when the invoice is issued to a customer without receiving the payment due. The advantage of accrual basis is the matching of revenues with related costs, thanks to which we can see the full impact of transactions during one reporting period. Many countries decide to switch to accrual based accounting, which is part of the process of changing the financial statements for public sector to the style of the private sector (A. Wynne 2007, p.3).

Types of accrual accounting

Accounting Standards Framework from 1995 defined by The International Organization of Supreme Audit Institutions distinguish two types of accrual accounting (M. P. van der Hoek 2007, p. 35):

  1. Modified accrual accounting - a system that records expenses when resources are received, while revenues when they are available during the accounting period and shortly thereafter and are measurable.
  2. Full accrual accounting - a system that capitalizes fixed assets, records revenues as achieved and recognizes incurred expenses.

Goals of the migration to accrual basis accounting

Accrual accounting has been successfully integrated into the accounting system in developed economies, but in developing economies it has not yet succeeded (G. Tickell 2010, p. 74). Countries that have switched to an accrual-based system have common goals (M. P. van der Hoek 2007, p. 38):

  • improving financial reporting,
  • complementing performance management,
  • better understanding of program costs,
  • enabling better financial management,
  • improving cash and asset management,
  • improving and expanding information about resource allocation.

References

Author: Anna Machniak