Accrual Concept

The accrual concept is an accounting method that recognizes revenue and expenses when they are earned or incurred, regardless of when payment is actually received or made. This means that revenue is recognized when it is earned, and expenses are recognized when they are incurred, even if the cash hasn't been exchanged yet.

Difference between amount of receipt and right to receive an amount

The difference between the amount of receipt and the right to receive an amount is known as an accrued income or accrued revenue. Accrued income is income that has been earned but not yet received, while accrued expenses are expenses that have been incurred but not yet paid.

For example, let's say a company provides services to a customer and sends an invoice for $1,000. The customer hasn't paid the invoice yet, but the company has earned the revenue, so it is recognized as accrued income. On the other hand, if a company incurs expenses for supplies but hasn't yet paid the supplier, the expense is recognized as an accrued expense.

Importance of the Accrual Concept

The accrual concept is important in accounting because it provides a more accurate picture of a company's financial situation. By recognizing revenue and expenses when they are earned or incurred, regardless of when payment is actually received or made, the accrual concept provides a more realistic view of a company's profitability and financial health.

Without the accrual concept, a company's financial statements may not accurately reflect its true financial position. For example, a company may appear to be profitable if it receives a large payment from a customer, but if that payment is for services that haven't been performed yet, the company's profitability may be misleading.

Conclusion

In summary, the accrual concept shows the difference between the amount of receipt and the right to receive an amount, which is known as accrued income or accrued revenue. By recognizing revenue and expenses when they are earned or incurred, regardless of when payment is actually received or made, the accrual concept provides a more accurate picture of a company's financial situation.