Accrual basis of accounting means that the costs or revenues of events are recognized in the period in which they occur though the cash flows may take place in another accounting period.
Like for a period of July 05 - October 05 if the organization was due to receive 1000K from an individual X but has not recieved yet for some reason will recieve in November 05. It would be still be accounted for in the period July 05 - October 05 and not the period starting from November 05.
Accrual is based on Matching Principals which means you match your expenses and revenues in the period they occur it a GAAP method of accounting which means revenues are recognized in the period they are earned and expenses are recognized in the same period as the revenue.
Eg Unlike cash basis where u recognize cash when u receive it in hand according to accrual method if u have 5000$ receivable at year end you should recognize it as account receivable...in that particular year...
Accrual is a ascertained future Liability/Income. It doesnt mean that Original liability/income/expense should not be exactly equivalent to the provision.
Accrual for showing the true and fair view of the financials.
An accrual means recording the transactions to the related period financial statements for example m/s james & co. has policy that to pay rent of the month at the 3rd of next month. if company prepares financial statements for the perios 1st april 2005 to 31st march 2006 the rent for the month of march is to be paid at 3rd April of 2006. Here the rent for march'06 is not paid at the end of the financial year. but it is to be considered in the financial year as expenditure.
Accruals allow expenses to be reported when incurred not paid and income to be reported when it is earned not received. An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses at the time in which the transaction occurs rather than when payment is made (or received).
