Accrual vs Cash Basis: A Bigger Picture?

📌 CONCEPT: Accrual accounting is a method of recording transactions where expenses are recognized when incurred, regardless of when payment is made.

📐 RULE / FORMULA: The accrual principle states that expenses should be recorded in the accounting period in which they are incurred, not when payment is made.

💡 WORKED EXAMPLE: Rohan Enterprises incurs an expense of ₹50,000 for a piece of equipment on January 1st. Since the expense is incurred in the accounting period 2019-20, it should be recorded as such, even though the payment is made on July 31st, 2020. This follows the accrual principle of matching expenses with revenues in the same accounting period.

⚠️ COMMON MISTAKE: Students often confuse accrual accounting with cash basis, thinking that expenses should only be recorded when payment is made, rather than when the expense is incurred.