The accrual method of accounting is also known as accrual accounting or accrual basis accounting. There are two very important rules about income and expenses in this method of accounting.

Reporting of income
In the accrual method of accounting, income is reported in the period it is earned. Even if the income is received or not, the accountant has to include the income in the books of accounts.

Deduction of Expenses
In this method, the expenses made by the firm are deducted in the same fiscal period irrespective of whether these are actually paid or not.

Accrual method of accounting is perhaps the best method to gauge the present financial condition of a company due to the combination of current cash inflows and outflows with the expected cash inflows and outflows in the future. The accrual method assumes that when a company makes a sale, the revenue will be received in the coming future, and it includes the sale in the accounts of the company. On the other hand, in the cash method of accounting, the sale will not be reported until the company gets all its dues. Let us now understand the cash vs accrual method of accounting comparison with the help of a suitable example. Read the rest of this entry »