What is the accruals concept?
Okay, in my last post I explained the entity concept. Today, it’s the turn of the accruals concept. The accruals (or matching) concept is probably the one that most accounting students come across so often. It also underpins quite a few of the complex accounting standards. So what does the accruals concept entail?
The matching concept is probably a better name for it, as the accruals concept is all about matching costs and revenues. When cash comes in from sales, or is paid out for costs does not matter. Let me give you an example. Assume a business has a delivery van which cost €20,000 and will be good for 5 years. This means it helps to generate revenue (by delivering goods) for 5 years. The accrual concept would dictate that the cost is matched against the revenue generating capability. So, even if the van were bought and paid for right now, the cost in the accounts would be €4,000 per year for each of the five years. In this way, the cost is matched against revenues over the same time frame. Here’s another real life example. How do you think an airline like Ryanair accounts for its’s revenues? You buy the ticket weeks or months in advance, so can they record the sale once you pay? The answer is no, as no cost has been incurred. Once you fly, the cost is now incurred and the revenue (sale) can be recorded in the accounts, even though the cash has been paid in advance.
Watch out for more on the basic accounting concepts soon!