Definition of Accrual-Basis Accounting
Accrual-basis accounting is the accounting type and standard in which all organization interactions are recorded to the various financial statements and sheets at the same time as the actions to which they are related occur. Due to the fact this is not always when currency changes hands, "payable" and "receivable" accounts called "accruals" are created.
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Accounting Principles
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Accrual accounting has a set of four major principles that the regulations and standards placed upon it generally support and guide: consistence, comparability, reliability and relevance.
Consistence is making sure that data gathered across a length of time is gathered in the same way and presented in the same way. Comparability is making sure that data gathered across similar companies is also gathered and presented in similar way--in this case, within the bounds and regulations of accrual accounting standards. Reliability is making sure that the data was correctly gathered, processed and displayed on the financial statements. Reliability often is determined by a third party. Relevance is simply ensuring that only data that matters to the subject at hand is presented.
Assets
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The first part of the accounting equation, assets, are written directly onto the financial sheets at the point when whatever action occurs happens, not at the moment when it is paid for. If an action is done for a customer, regardless of whether it is selling an item or providing a service and it is worth a certain value, it will be recorded as a receivable if paid in the future and as cash if paid immediately. This way, it is shown in accounting documents that the company has been providing goods or services to others and is more financially healthy than it would if it had not recorded receivables.
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Liabilities
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Liabilities are affected much the same way as assets are in accrual accounting. Similar to how revenue earned but not yet received is placed under the accounts receivable category, with liabilities expenses due but not yet paid are placed under a payable category. This often includes such things as salaries payable, rent payable and insurance payable. When this is paid for, it is removed from the cash column and the payable column, as the payable amount left is now zero due to it having been paid off).
Equity
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Due to the changes in assets and liabilities or perhaps causing them (depending on your view), the largest change in accrual accounting is that of equity. This is also widely considered to be the primary reason that accrual accounting exists, as compared to cash-based accounting.
The two governing principles of equity in accrual accounting are revenue recognition and the matching principle. Revenue recognition requires that revenue is stated at the time when the transaction that caused it happens. The matching principle requires that expenses are stated at the time that the revenue that generated them (i.e., the sale of inventory and cost of goods sold) happened.
Cash-Basis Accounting
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Cash-basis accounting, the other major form of accounting, is banned for organizations in many countries due to the inaccuracies involved. Because revenue and expenses only are recorded when money changes hands, actions performed on the assumption of future payments are not recorded, and as such, the health of the company is not accurately displayed.
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References
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