Also the December 31 balance sheet will report a liability such as utilities payable of $300 to communicate a more accurate measure of obligations at December 31. Under the accrual basis of accounting I will report the rent expense in December because the rent was used up in December, and I will also report estimated utilities expense of $300 so that the December income statement provides a better measure of December's profitability. However, the utilities will not read the meters until January 1, will bill me on January 10 and require that I pay the bill by February 1. Now let's assume that I paid office rent of $1,500 and incurred $300 of costs for electricity, gas, and sewer/water during December. Example of Reporting Expenses Under the Accrual Basis of Accounting Under the accrual basis of accounting my business will report the $10,000 of revenues I earned on the December income statement and will report accounts receivable of $10,000 on the December 31 balance sheet. Rather, my clients paid the $10,000 in January. Since I allow clients to pay in 30 days, none of the $10,000 of fees that I earned in December were received in December. Let's assume that I begin an accounting business in December and during December I provided $10,000 of accounting services. Example of Reporting Revenues Under the Accrual Basis of Accounting Therefore, the accrual basis of accounting provides a more accurate measure of a company's profitability during an accounting period, and a more accurate picture of a company's assets and liabilities at the end of an accounting period. Rather the focus is: 1) what revenues were earned, and 2) what expenses were incurred. In other words, under the accrual basis of accounting, the receipt of cash and the payment of cash are not the focus of reporting revenues and expenses. (The expenses that were not paid in the current accounting period will be reported through adjusting entries.) When an expense occurs and cash has not yet been paid, a liability account will also be recorded.

(Under the cash basis of accounting, revenues are not reported on the income statement until the cash is received.)Īlso under the accrual basis of accounting, expenses are reported on the income statement when they match up with the revenues being reported, or when a cost has no future benefit that can be measured.

When the revenues are earned but cash is not received, the asset accounts receivable will be recorded. Under the accrual basis of accounting (or accrual method of accounting), revenues are reported on the income statement when they are earned. What is the accrual basis of accounting? Definition of Accrual Basis of Accounting

Current cost basis of measurement