Definition the Accrual basis of Accounting

Under the accrual basis of accountancy (or accrual technique of accounting), profits are report on the income statement as soon as they room earned. When the earnings are earned however cash is not received, the asset account receivable will be recorded. (Under the cash communication of accounting, profits are no reported ~ above the revenue statement till the cash is received.)

Also under the accrual communication of accounting, expenses are report on the earnings statement once they enhance up v the earnings being reported, or once a expense has no future benefit that deserve to be measured. Once an cost occurs and also cash has not yet been paid, a legal responsibility account will additionally be recorded. (The costs that were not paid in the existing accounting duration will it is in reported through adjusting entries.)

In other words, under the accrual basis of accounting, the receipt the cash and also the payment the cash are not the focus of reporting revenues and also expenses. Fairly the emphasis is: 1) what earnings were earned, and also 2) what costs were incurred. Therefore, the accrual communication of accountancy provides a more accurate measure up of a company"s profitability throughout an accountancy period, and also a more accurate picture of a company"s assets and liabilities at the finish of an bookkeeping period.

You are watching: Which of the following is not a characteristic of the accrual basis of accounting?

Example the Reporting revenues Under the Accrual basis of Accounting

Let"s assume the I begin an audit business in December and also during December I provided $10,000 of accountancy services. Due to the fact that I enable clients to pay in 30 days, none of the $10,000 of fees that i earned in December were obtained in December. Rather, my clients paid the $10,000 in January. Under the accrual communication of bookkeeping my service will report the $10,000 of profits I earn on the December income statement and also will report account receivable that $10,000 ~ above the December 31 balance sheet.

Example the Reporting expenses Under the Accrual basis of Accounting

Now let"s assume that i paid office rental of $1,500 and incurred $300 of prices for electricity, gas, and also sewer/water during December. However, the utilities will not read the meters until January 1, will certainly bill me top top January 10 and also require that i pay the bill by February 1. Under the accrual communication of accounting I will report the rent price in December because the rental was supplied up in December, and I will additionally report approximated utilities cost of $300 so the the December earnings statement provides a far better measure that December"s profitability. Additionally the December 31 balance sheet will report a liability such together utilities payable of $300 to interact a more accurate measure up of duties at December 31.

Comparing Accrual communication to Cash Basis

Using the transactions above, the accrual basis of accounting will an outcome in the December revenue statement reporting profits of $10,000 and also expenses of $1,800 because that a net revenue of $8,200.

Using the cash communication of accounting the December earnings statement will report $0 revenues and expenses the $1,500 because that a net loss that $8,500 even though I had actually earned $10,000 in audit fees. Further, the balance sheet will certainly not report the duty for the utilities the were used. The January revenue statement will certainly report the collection of the fees earn in December, and also the February earnings statement will certainly report the expense of making use of the December utilities. Hence, the cash communication of accounting can it is in misleading to the reader of the financial statements.

See more: Painting Planets Craft - How To Paint Planets With Watercolor

For jae won statements ready in accordance with typically accepted accounting principles, the accrual communication of accounting is required since of the corresponding principle.