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The Accrual Concept, also known as the Periodicity Concept and Mercantile Accounting System, is a fundamental principle in accounting.
It involves recognizing revenues and expenses when they are due, regardless of whether the cash has been received or paid by the end of the accounting period. This principle ensures that revenues are recorded when they are earned and expenses when they are incurred.
Under this concept, revenues are recognized when they become receivable, even if the cash has not yet been received. Similarly, expenses are recognized when they become payable, even if the cash has not yet been paid. Transactions are recorded in the accounting period to which they relate, thereby distinguishing between the accrual receipt of cash and the right to receive cash for revenues, as well as the actual payment of cash and the obligation to pay cash for expenses.
Example of Accrual Concept:
For example, if M/s XYZ & Co sells goods worth ₹75,000 on March 20, 2024, and receives the payment on April 15, 2024, the amount is considered due and payable on the sale date, March 20, 2024. Thus, it must be included in the revenue for the fiscal year ending March 31, 2024.
Similarly, if M/s XYZ & Co receives goods costing ₹35,000 on March 27, 2024, but makes the payment on April 7, 2024, the expense must be recorded for the fiscal year ending March 31, 2024, despite the payment being made in the next fiscal year. The person to whom the payment is owed is recorded as a creditor.
The significance of the Accrual Concept includes:
It helps in accurately determining the actual expenses and income during a specific period.
It aids in calculating the net profit of the business more accurately.
By adhering to the accrual concept, businesses can ensure a more accurate representation of their financial position and performance over a given period.
Read the next article to learn more about the Matching concept.