Accrual Basis Accounting

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Any transaction where the amount involved becomes due for payment or yet to be received in the future is known as an accrued amount.

In accrual basis accounting, revenues are reported on the profit and loss statement when they are earned and not when cash is received. Similarly, expenses are reported when they are incurred and not when they are paid. This enables a business to accurately track the profitability of a business for a particular period.

Accrual basis of accounting must be followed when financial reports are prepared according to the Generally Accepted Accounting Principles because of the matching principle.

For example, a business makes a sale of 10,000 in July and gets paid in August. In accrual basis of accounting, the revenue that is earned from the 10,000 sale is reported in July even though the business receives the money in August.

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