ACCRUAL ACCOUNTING Meaning and
Definition
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Accrual accounting is a method of financial reporting that recognizes and records revenues and expenses in the financial statements when they are incurred, regardless of when the corresponding cash transactions occur. This accounting method aims to provide a more accurate and comprehensive representation of a company's financial position and performance by matching revenues with the expenses that generated them.
Under accrual accounting, revenues are recognized when they are earned, even if the payment has not been received yet, and expenses are recognized when they are incurred, even if the funds have not been paid. This approach allows companies to reflect the economic impact of all transactions in the period in which they occur, providing a more realistic snapshot of financial performance.
By contrast, cash basis accounting, which is an alternative method to accrual accounting, only recognizes revenues and expenses when the cash is actually received or paid. While cash basis accounting may be simpler to apply, it can lead to misleading financial statements as it does not provide a complete picture of a company's financial activities.
Accrual accounting is particularly relevant for businesses with long-term projects or transactions that span multiple periods. It is widely used by companies, as well as by governments and non-profit organizations, and is a foundational principle of Generally Accepted Accounting Principles (GAAP) in many jurisdictions.
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Etymology of ACCRUAL ACCOUNTING
The word "accrual" comes from the Latin word "accrescere", which means "to grow or increase". In accounting, "accrual" refers to the recognition of revenue or expenses when they are earned or incurred, regardless of when the cash is exchanged.
The word "accounting" is derived from the Old French word "aconter", which means "to reckon" or "to count". Accounting is the practice of recording, analyzing, and reporting financial transactions of a business.
Therefore, the term "accrual accounting" refers to a method of accounting that records revenue or expenses when they are earned or incurred, rather than when the cash is received or paid.
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