What is ‘Accrual Accounting’?
Accrual Accounting is a technique of accounting in which transactions viz. revenue and expenses are recorded as and when they are incurred irrespective of when the cash is exchanged. This is highly significant in the assessment of the health of any organisation.
- This is useful in businesses where many credit transactions or even goods and services are sold on credit without actual payment made at the time either in cash or cheque.
- Expenses are usually balanced against revenues in the income statement. This reflects a great picture of the financial health of the company.
Despite the uses, a major problem with accrual accounting is that one has to pay tax on revenues even though one has not received the latter in reality.