The Accrual Principle
The accrual principle is the concept that you should record accounting transactions in the period in which they actually occur, rather than the period in which the cash flows related to them occur. The accrual principle is a fundamental requirement of all accounting frameworks, such as Generally Accepted Accounting Principles and International Financial Reporting Standards.
Examples of the proper usage of the accrual principle are:
- Record sales when you invoice the customer, rather than when the customer pays you.
- Record an expense when you incur it, rather than when you pay for it.
- Record the estimated amount of bad debt when you invoice a customer, rather than when it becomes apparent that the customer will not pay you.
- Record depreciation for a fixed asset over its useful life, rather than charging it to expense in the period purchased.
- Record a commission in the period when the salesperson earns it, rather than the period in which he is paid it.
- Record wages in the period earned, rather than in the period paid.
When properly implemented, the accrual principle allows you to aggregate all revenue and expense information for an accounting period, without the distortions and delays caused by the cash flows arising from that accounting period.
Recording transactions under the accrual principle may require the use of an accrual journal entry. An example of such an entry for a sale on credit is:
In this entry, revenue is recorded before payment from the customer arrives, along with an accounts receivable asset in the same amount. In the following month, the customer pays the company, and the company records the following entry:
| Accounts Receivable
The cash balance increases as a result of the customer payment, which also eliminates the accounts receivable asset.
If you do not use the accrual principle, then you are using the cash method of accounting, where you record revenue when cash is received and expenses when they are paid. There are also modified versions of the cash method of accounting that allow for the limited use of accruals.
The accrual principle is also known as the accrual concept.