Definition of Accrual Basis Accounting



Accrual basis accounting assumes that revenues and expenses should be recorded at the moment they are realized and incurred respectively. Under accrual basis accounting the revenue is not recorded unless it is earned and expenses are recorded as soon as the firm has received its benefits.

 


When a customer has paid in advance for goods that have not yet been transferred to the customer, the accrual basis says that the company should record this as a liability. As soon as the goods are handed over to the customer the liability will become income.

 


Similarly, for example, at the end of each month, the salary is due to be paid to employees but the cash is not transferred to employees’ accounts until after 7th of the next month. In this case, the company should record an expense at the end of the month irrespective the salary is paid in cash or not.

 

View More Finance Definitions