ACCRUAL BASIS Meaning and
Definition
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Accrual basis refers to an accounting method that records and recognizes revenues and expenses when they are earned or incurred, regardless of when the actual cash is received or paid. Under this accounting principle, financial transactions are recognized in the accounting books as they occur, giving a more accurate representation of a company's financial position and performance.
In accrual basis accounting, revenue is recognized when the company provides goods or services to the customer, not when the cash is received. This ensures that revenue is reported in the same accounting period as the expenses incurred to generate that revenue, allowing for a more accurate matching of revenues and expenses. Similarly, expenses are recorded when they are incurred, even if the payment is made in a different accounting period.
The accrual basis of accounting provides a more comprehensive and timely view of a company's financial condition than the cash basis of accounting, which records revenues and expenses only when cash is exchanged. By using accrual basis accounting, businesses can get a clearer picture of their profitability, financial stability, and performance over the long term.
The accrual basis is widely used by companies, especially those operating on a larger scale, as it helps to facilitate more informed decision-making and comply with accounting standards. Additionally, it is essential for financial reporting purposes, such as preparing accurate financial statements and meeting regulatory requirements.
Common Misspellings for ACCRUAL BASIS
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Etymology of ACCRUAL BASIS
The word "accrual" derives from the verb "accrue", which entered the English language in the late 15th century from the Old French word "accrue", meaning "to increase or grow". The Old French term originated from the Latin word "accrescere", which has the same meaning.
The term "basis" comes from the Latin word "basis" as well, which traces back to the Greek word "basis" meaning "a step, pedestal, or foundation".
Therefore, when combined, the term "accrual basis" refers to a foundation or system of accounting where income and expenses are recognized and recorded when they occur, rather than when the cash is received or paid out.
