Definition: When transactions are recorded in the books of accounts as they occur even if the payment for that particular product or service has not been received or made, it is known as accrual based accounting. This method is more appropriate in assessing the health of the organisation in financial terms. Show Description: To understand accrual accounting, let's first understand what we mean when we say the word 'accrual'. Accrual refers to an entry made in the books of accounts related to the recording of revenue or expense paid without any exchange of cash. The use of accrual accounting is typically useful in businesses where there are a lot of credit transactions or the goods and services are sold on credit, which simply means that there was no exchange of cash. Let's understand Accrual accounting with the help of an example. Suppose you are a firm M/S ABC Pvt Ltd, and you are using accrual accounting to maintain your books of accounts. Here, any revenue or income which is generated by sales and expenses incurred are recorded as they occur. If you sell your goods or products on credit, the sale is recorded in the books based on the invoice generated. There is a possibility that you may not have received the payment by cash at that particular point in time. An expense is occurred or recorded when the raw material is ordered and not when the actual payment is made to the supplier by either cash or cheque. The only drawback of this type of accounting system is that you, as a firm, might end up paying tax on revenues even when you might have not received it (credit). Under the accrual method of accounting expenses are balanced with revenues on the income statement. It helps give a better picture of the company's financial condition.
Related NewsWhat is the Money Measurement Concept?The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements. Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:
All of the preceding factors are indirectly reflected in the financial results of a business, because they have an impact on either revenues, expenses, assets, or liabilities. For example, a high level of customer support will likely lead to increased customer retention and a higher propensity to buy from the company again, which therefore impacts revenues. Or, if employee working conditions are poor, this leads to greater employee turnover, which increases labor-related expenses. Problems with the Money Measurement ConceptThe key flaw in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business (as just noted), but the concept does not allow them to be stated in the financial statements. The only exception would be a discussion of pertinent items that management includes in the disclosures that accompany the financial statements. Thus, it is entirely possible that the key underlying advantages of a business are not disclosed, which tends to under-represent the long-term ability of a business to generate profits. The reverse is typically not the case, since management is encouraged by the accounting standards to disclose all current or potential liabilities in the notes accompanying the financial statements. In short, the money measurement concept can lead to the issuance of financial statements that may not adequately represent the future upside of a business. However, if this concept were not in place, managers could flagrantly add intangible assets to the financial statements that have little supportable basis.  ACCOUNTING • Is the systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit. • It underlying purpose is to provide financial information • It is capable of being expressed in monetary terms THE PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (PICPA) • defines accounting as a service activity. Its function is to provide quantitative information, primarily fianncial in nature, about economic entities, that is intended to be useful in making economic decisions. NATURE OF ACCOUNTING 1. Accounting is a systematic process. • Process o is a series of actions that produce something or that lead to a particular result. The performance of the four aspects of accounting leads to communicating to its users the relevant financial information needed by the parties interested. 2. Accounting is an art. Art o is a skill acquired by experience, study or observation. It is also defined as an occupation requiring knowledge or skill. The four aspects of accounting require both knowledge and skill through experience, study, observation as a means to produce the key end product which are the financial reports. 3. Accounting is a service activity. Service o is the occupation or function of serving. Activity is something that is done to work or for a particular purpose. Combining the meaning of two words, accounting is a work or occupation for serving a particular purpose. Hence, since its purpose is to provide financial information, the data that it will process in terms of the four aspects of accounting should expressed in monetary terms. In short, it is interested in activities that can be measured and expressed in terms of the value of money. FOUR ASPECTS OF ACCOUNTING 1. RECORDING a. writing down of business transactions chronologically in the books of account as they transpire. 2. CLASSIFYING a. sorting similar and related business transactions into the three categories of assets, liabilities and owner's equity. 3. SUMMARIZING a. preparing the financial statements from the transactions recorded in the books of account that are designed to meet the information needs of its users. What does accounting measure?Accounting measurement is the computation of economic or financial data in terms of money, hours, or other units. The method used in accounting measurement helps compare and evaluate accounting data.
Which accounting concept measures items in monetary terms?What is Money Measurement Concept. Money measurement concept is an important accounting concept that is based on the theory that a company should be recording only those transactions that can be measured or expressed in monetary terms on the financial statement.
What activities do accounting measure?Accounting is a system for measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other stakeholders to help them make better business decisions.
What is monetary accounting concept?The monetary unit principle states that business transactions should only be recorded if they can be expressed in terms of a currency. In other words, anything that is non-quantifiable should not be recorded a business' financial accounts. Over time, money has been adopted as a measurement unit in accounting.
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