What Is Accrual System of Accounting?

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Accrual accounting accurately reflects business activity as it occurs.
Accrual accounting accurately reflects business activity as it occurs. (Image: bean counter image by Chad McDermott from Fotolia.com)

Accrual accounting is a system for recording business transactions as they occur, regardless of when money is exchanged. This permits accounting for sales and expenditures on credit. The accrual method uses special accounts to temporarily record amounts owed to the business and owed by the business.

Accounts Receivable

Accounts receivable is the account holding revenue earned but not yet received. The account balance increases from selling to customers by extending credit. The account balance decreases upon collecting amounts customers owe. Sales to customers on credit are recorded with offsetting entries to revenue and accounts receivable.

Accounts Payable

Accounts payable is the account holding expenses incurred but not yet paid. The account balance increases when purchases are made from vendors extending credit. The account balance decreases upon payment of amounts owed to vendors. Purchases from vendors on credit are recorded with offsetting entries to expenses and accounts payable. An exception is purchase of items for resale, which are recorded with offsetting entries to inventory and accounts payable.

Inventory

Purchases of items held for resale are recorded in an inventory account. The account balance increases upon receipt of products and materials for resale. The account balance decreases upon delivery to customers of items from inventory.

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