Accounting is a science that interprets the economic facts of organizations, and orders them for their control, analysis and presentation. For that, it must operate based on clearly defined rules and principles to avoid variable results that do not reflect the financial reality of the business. But what is one of the most important? We will tell you everything about the accrual principle in accounting.
The accrual principle is what allows the effect of a financial transaction to be measured, even when the money has not actually changed hands. This is why it is one of the fundamental principles of financial accounting.
Objective of the accrual principle
The purpose of this principle is to faithfully reflect the financial situation of the company within each accounting year since, when applied, it is considered that any income or expense in the commitment stage is already an increase or decrease in equity for accounting and economic purposes.
Thus, through its application you ensure that each year or accounting period the company takes to the income statements (profit or loss account) exclusively the expenses and income that correspond to it, thus avoiding the mixing of data and operations between different exercises.
Characteristics of the accrual principle
In addition to being the principle by which economic events are accounted for when they arise and not until they are paid or collected, accrual is characterized by:
· Generate a qualitative and quantitative change in the equity of the respective organization, caused by transactions with an economic impact on its exercise.
· For the buyer, it produces an obligation to pay (expense) when goods or services are received, by signing an invoice, a contract, a promissory note or any other document that certifies the seller or service provider as a creditor.
· For the seller, it generates a credit in his favor (income) when he delivers goods or services, and receives in return the commitment to pay by signing an invoice, contract, etc.
· It implies the settlement of the expense and the simultaneous issuance of the respective payment order.
· In tax matters, it expresses the moment in which the taxable event is understood to have taken place and the moment in which the tax obligation arises, even if it is not yet payable.
· Time is essential, since the reason for the accrual principle is that the economic events are recorded in the period in which they were born. If someone works -for example- during January, but is paid the first months of February, the accounting entry must be made in the January period.
· When applying this principle, generally the amounts of "Income and Expenses" do not coincide with "Collections" and "Payments", since these last two accounts are affected when there are real movements of money.
Taking these characteristics into account, it can be deduced that it eliminates the possibility of applying the criterion of what is received for the attribution of results.
An example of accrual in accounting
Imagine that a Company X for which you do the accounting decided to sell a lot of computers in December 2017. As it is a large volume of merchandise, the buyer agrees with the company to pay in two installments, one for the month of February 2018 and the other for the month of May of the same year. Consequently, you must account for the economic event in 2017.
The same thing happens with services and payments. Suppose that Company X itself hired a marketing agency to run an advertising campaign on social networks. Such service was provided in the month of November 2017, the date on which the corresponding invoice was issued.
However, the contract signed between the company and the agency established that the payment should be made three months after the issuance of said tax document. In this case, we would be talking about February of the 2018 financial year. In this case, you must make the accounting record of the expense in the 2017 financial year and not in February 2018.
In the case of subsidies, the situation changes completely. When these are granted, the monetary collection of the same takes place, but its imputation to the income statement must be made at the moment in which they are definitive, that is, until all the requirements established in the granting of the same are met.
Accrual basis versus cash accounting
Cash accounting is one that only records the collections and payments that affect the cash, that is, those that really represent an income or output of cash.
Undoubtedly, it is a much simpler recording method than the one used under the accrual principle.
However, all companies in the world are inclined to use the latter. Which is the reason? Probably because cash accounting has many limitations.
By recording only the transactions that affect the cash, what you could do with its results is only a statement of cash flows , which would account exclusively for what has happened with the cash in a certain period of operations.
In other words, it would not reflect all the transactions that did not represent an effective outflow or inflow of money, such as purchases of assets on credit, obligations contracted and even amortization expenses.
This translates into incomplete accounting that does not reflect the company's real assets and financial situation, the fundamental objective of applying the accrual principle.
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