What is Accrual basis accounting?
In short
Accrual basis accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid. US Generally Accepted Accounting Principles (GAAP) require it.
Key takeaways
- It produces receivables, payables, prepaid expenses and unearned revenue.
- The cash basis records transactions only when cash changes hands, and is not GAAP.
- Converting from the cash basis to the accrual basis is treated as an error correction.
Example
Cash collected from customers $50,000; receivables rose from $8,000 to $12,000. Accrual revenue = $54,000.
Where it's tested
FAR: Conceptual Framework & Financial Statement Presentation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under the FASB conceptual framework, which of the following is one of the two fundamental qualitative characteristics of useful financial information?