Accrual Basis of Accounting – According to the accrual concept, revenue and cost are recognized as and when they occur instead of when they are actually paid or received in cash. The revenue is generated and the costs are incurred when the legal right to receive or obligation to pay is established.
Examples of Accrual Basis of Accounting
A Company records its electricity bills when it receives the bills, not when the payment is made, as electricity service has already been provided. In such a case, the company has to ignore the date on which the payment is being made.
A Mumbai-based Law firm has obtained its premises on rent and has paid Rs 1,20, 000 on 1st October. The premises have not been put to use yet so it hasn’t been recorded as an expense. A half-yearly report is prepared on 31st March, the firm expensed out six months’ rent i.e. 60,000 [Rs 1,20,000/12*6] because time equivalent to 6 months has expired.
Advantages of Accrual Basis of Accounting
- Exhibits a true and fair view of the financial performance and financial position as it takes into account all the adjustments like outstanding and prepaid expenses and unearned and accrued incomes.
- Based on matching principle of accounting.
- Recognised by Companies Act, 2013
Disadvantages of Accrual Basis of Accounting
- Determination of profits and losses under this method is a cumbersome process.
- This method is not free from personal bias.
- Various estimations are required to be made under this method.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards are designed to serve as a common global language of business affairs so that accounts of various companies are understandable and comparable across international boundaries.