Accounting Concept - 10. Accrual Concept:
While the realisation concept is mainly concerned with the recognition of revenues, the accrual concept is concerned with recognition of both revenues and expenses. In short, the accrual concept emphasises the realisation concept in regard to both revenues and expenses.
The accrual concept suggests that when a transaction has been entered into, it's consequences will certainly follow. So, all transactions must be brought into record, whether they are settled in cash or not. It suggests that an accountant is required to treat as revenues all those items for which there is the legal right to receive, although cash might not have been received for them. That means, if a revenue is earned, but no payment is received, the same should be recorded as revenue. Similarly, an accountant is required to treat as expenses all those items for which there is the obligation to pay, although cash might not have been paid for them. That means, if an expense is incurred, but no payment is made, the same should be recorded as an expense.
This concept also means that, if there is a net increase in the owner's capital during any year, without any additional capital introduced by the proprietor, the net increase in the capital is the net profit for that year, and if there is a net decrease in the owner's capital in any year without any withdrawals by the proprietor from business, the net decrease in the capital is the net loss for that year.
While the realisation concept is mainly concerned with the recognition of revenues, the accrual concept is concerned with recognition of both revenues and expenses. In short, the accrual concept emphasises the realisation concept in regard to both revenues and expenses.
The accrual concept suggests that when a transaction has been entered into, it's consequences will certainly follow. So, all transactions must be brought into record, whether they are settled in cash or not. It suggests that an accountant is required to treat as revenues all those items for which there is the legal right to receive, although cash might not have been received for them. That means, if a revenue is earned, but no payment is received, the same should be recorded as revenue. Similarly, an accountant is required to treat as expenses all those items for which there is the obligation to pay, although cash might not have been paid for them. That means, if an expense is incurred, but no payment is made, the same should be recorded as an expense.
This concept also means that, if there is a net increase in the owner's capital during any year, without any additional capital introduced by the proprietor, the net increase in the capital is the net profit for that year, and if there is a net decrease in the owner's capital in any year without any withdrawals by the proprietor from business, the net decrease in the capital is the net loss for that year.
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