According to the accrual concept, a business transaction is recorded as and when it occurs and not when payment for the same is received/made. The sale from any transaction is recorded under accrual concept i.e. when the sale actually occurs and not when the payment for the same is received; similarly, in the case of an expense, the transaction is recorded when the expense is incurred and not when payment for the same is made.
A Company records its electricity bills when it receives the bills, not when the payment for the same is made, as electricity service has already been provided to the company. In such a case, the corporate has got to ignore the date on which the payment is being made.
A Mumbai-based 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 recorded this payment. 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.
Air Asia sells its tickets days or even weeks before the actual flight date, but it does not record the receipts as revenue because the flight being the event on which revenue is based has not occurred to date.
According to The American Institute of Certified Public Accountants “Principles of Accounting are the overall law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”
After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.
After browsing this lesson, you shall be ready to understand the subsequent Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual