Accruals are the earnings of Income and incurred expenses which are not accounted in our books of accounts so far.Accruals are those expenses and earning which are recorded through adjusting entries in the books even if payment is made or received at the time accounting. A few examples can understand you the accruals better.
Why Accrual Accounting?
Accrual Accounting Helps to understand the accurate position of a company’s current financial situation as it record the expenses and Income which are become due.In other words it record company’s future transactions also.
It helps to overcome the limitations of cash accounting,In cash accounting we account expense or income which are paid or received.
Example of Accruals.
Usually business deposit money in any Investment Schemes.For examples Bank Fixed Deposit.
Consider a deposit on 01-07-2016 of 50000 for 2 Months .Bank offer a simple interest rate of 9% Per Year. Every month we earn interest for the deposit.but bank is not giving any interest to deposit until the maturity date .We know earning interest from Deposit every month to which we do not make any entry. To know accurate monthly profit or loss of business you have to include these Income to the statement.
Let’s calculate the interest for August 2016 = 50000 x 9% /12 = 750.
Let’s call this Accumulated Income as Accrued Interest. So accrued interest is interest earned but not received and accounted. A kind of receivable, hence accrued Interest is a Current Asset.
How to Account Accrual
From the Above example,We need to report or include the Interest to the Profit & Loss Account to get correct profit and to report Income to the balance sheet to know the receivables position.
Debit: Accrued Income -750 ( Current Asset- Receivable)
Credit:Interest Account-750 ( Income)
When Interest is received from bank
Debit: Cash /Bank Account – 750
Credit: Accrued Income Account-750 ( To remove , write off, clear the current Asset)
Almost every organisation pay bonus to its employees, usually the current Financial year Bonus shall be paid on next Financial years which means expenses are accrued but not paid in the same financial year. To account this accrued expenses.
Debit : Bonus Account
Credit: Bonus Payable ( Current Liabilities – Payable)
When Bonus are paid
Debit: Bonus Payable ( To write off Liability from Balance sheet)
Credit: Cash /Bank Account