Accrual accounting represents a method of financial accounting that permits a company to recognise revenue upon the provision of goods or services, before receiving payment, and to document expenses as they occur. This approach diverges from the cash basis accounting, which records revenue only upon the receipt of payment for goods and services.
Essentially, this method involves the recording of revenue and expenses in the company’s ledger at the time the transaction occurs, irrespective of when the actual cash is exchanged. The principle underlying accrual accounting mandates the recording of journal entries for transactions at the point of sale or service delivery, as well as for obligations and receivables.
One of the primary advantages of accrual accounting is its ability to amalgamate both present and anticipated cash movements, providing a comprehensive view of a company’s financial health in the immediate and longer term. This method adheres to the matching principle, asserting that revenues and related expenses should be recognised within the same financial period to ensure financial reporting accuracy.
The International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) advocate for accrual accounting, highlighting its significance. Given that the Singapore Financial Reporting Standards (SFRS) draw heavily from the IFRS, accrual accounting becomes a critical concept for corporations within Singapore. This adherence establishes accrual accounting as the normative practice across the majority of businesses, with limited exceptions applying to small enterprises and individual proprietors.