Accrual Basis Accounting Essay example

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Accrual Basis Accounting Accrual accounting is a system of accounting that is based on the accrual principal accounting. This principal requires revenue to be recognized and recorded when earned. Expenses are to be recorded when they occur. The accrual basis of accounting is used by most companies. Very small businesses and individuals use cash basis accounting. The major distinction between the accrual and the cash basis of accounting is when revenue and expenses are recognized. When the cash method is used, revenue is recorded when money is received. Expenses are recorded only when money is paid. The Accrual method accounts for revenue when it is earned. Expenses for goods and services are recorded when they are incurred. The…show more content…
Some payroll policies allow for the carry over or roll over some or all unused time that has been accrued into the next year. If the accrual policy does not have any type of rollover, any accrued time that has been taken is usually lost at the end of the employer's calendar year. The accrual basis of accounting conforms to the GAAP financial statements preparation provisions for external users. The US GAAP website describes financial guidelines, provides an understanding of the financial guidelines, and describes management's general flexibility. You must understand the flexibility in the GAAP standards and relate it to the individual company and its industry. Regulators view earnings quality as high when generally accepted accounting principles are adhered to. Management typically describes the accounting choices and estimates that are embedded in the company's key critical accounting policies in the “Management Discussion and Analysis” (MD&A) section of the Form 10-K. Accrual accounting enables management to exercise its unique understanding of their business to convey important information about its economic welfare (relevance) and allows management some discretion to manipulate important information about the company’s economic welfare (reliability). Accounting analysis evaluates management's judgment on how it chooses to use accruals. The company’s current accounting policies should be creating accurate accounting estimates. Extreme accruals that
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