The principle of accrual accounting is a method of accounting that recognizes revenues and expenses when they are incurred, rather than when cash is received or paid. This means that transactions are recorded when they happen, rather than when money changes hands.
In accrual accounting, revenues are recognized when they are earned, regardless of when payment is received. For example, if a company provides services to a customer in December but does not receive payment until January, the revenue would be recorded in December, when the services were provided.
Similarly, expenses are recognized when they are incurred, regardless of when payment is made. For example, if a company incurs expenses in December but does not pay the bills until January, the expenses would still be recorded in December.
The principle of accrual accounting provides a more accurate picture of a company’s financial position, as it takes into account all transactions, including those that have not yet been paid for or received. This method of accounting is required for most businesses under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). In Singapore, the Singapore Financial Reporting Standard (SFRS) is used and it is generally in line with the IFRS.