Definition of Accrual Method
The accrual method of accounting reports revenues on the income statement when they are earned even if the customer will pay 30 days later.
The accrual method of accounting also requires that expenses and losses be reported on the income statement when they occur even if payment will take place 30 days later.
The accrual method of accounting, which is also known as the accrual basis of accounting, is required for large corporations. (The cash method of accounting may be used by individuals and some small companies.) The accrual method and the associated adjusting entries will result in a more complete and accurate reporting of a company’s assets, liabilities, equity, and a more accurate reporting of its revenues, expenses, and earnings during each accounting period.
Example of the Accrual Method
Assume that a company sells $48,000 of merchandise on May 15, but allows the customer to pay on June 15. On May 15, the company will credit its income statement account Sales and will debit its current asset account Accounts Receivable. (When the customer pays on June 15, the company will debit Cash and will credit Accounts Receivable.)
Assume the company had a $10,000 plumbing repair done on May 31 and is told the amount will be $10,000 but the bill will not be received until June 3 and payment will be due on June 13. On May 31, the company will debit Repairs and Maintenance Expense for $10,000 and will credit the liability account Accrued Expenses (or Accounts Payable). (On June 13, the company will credit Cash and will debit the liability account.)
