Question

Explain the accrual basis of accounting and give suitable example

Answer 1

Income is recorded when it accrues(earned) and expenses are recorded when they accure(be payable). All expenses and revenues related to the accounting period are to be considered irrespective of the fact the revenues are received in cash or not or expenses are paid in cash or not.
E.g.: A company invested rupees 1,00,000 with a bank for one year on 1st Oct, 2010. Bank has to pay interest at 10% p.a. on its maturity I.e. on 30th sept. 2011.
As per the principle of accrued interest of 6 months is rupees 5,000(1,00,000×10/100×6/12) to be shown as " Interest Accrued" on the credit side of profit and loss account during financial year 1st April 2010 to 31st March 2011.