How Do You Understand The Basics Of Accrual Accounting?
Accrual accounting records revenue and expenses when they are incurred regardless of when money is exchanged. In a cash accounting system, revenue is recognized only when money is received and expenses are recorded only when cash is paid. Cash accounting only requires accounts for revenue and expenses plus cash accounts such as a checking account. The accrual method of accounting recognizes transactions on credit. For sales where credit is extended to customers, the accrual method creates an account called “accounts receivable.” This account is used to deposit revenue until money is received later for deposit to the bank account. For purchases from vendors on credit, the accrual method creates an account called “accounts payable.” This account is used to pay for expenses until cash is sent later from the bank account. Record each sale on credit as an increase in the account for revenue and an increase in the asset account called “accounts receivable.” Bookkeepers recognize this transac
