Accrual Accounting

• Takes into account the Revenue earned and Expenses incurred.
• Whether you have received the revenue or not - as long as you have earned it - it shall be used to measure profit.
• Similarly, whether you have paid or not - as long as you have incurred an expense it shall be used to measure profit.

• You may have paid an expense but not incurred the expense.
• You may have incurred the expense but not paid it.
• You may have received cash for revenue but not earned it yet.
• You may have earned the revenue but not received it.

Examples

Accrued Expense:

• The last time you paid wages was on 30 November.
• As at 31 December your records show that you have paid a total of $4000 in wages.
• Your employee has worked in December but you have not paid the wages which amounts to $500.
  • There are two things to this:
    • What is your total wages expense for the period?
    • What is your wages liability for the period?
• Wages Expense = $4000 (already paid) + $500 (unpaid) = $4500
• Accrued Expense (in regards to wages) = $500

Reporting:

Expenses are reported in the Profit and Loss Statement and Accrued Expense(which is a liability is reported in the Balance Sheet)