What is accrual accounting?

• Accounting standards require financial statements to be prepared on the basis of accrual accounting
• Accrual accounting is a system in which transactions and events are recorded in the periods they occur, rather than in the periods the entity receives or pays the related cash
• A cash accounting system would determine profit or loss as the difference between the cash received in relation to income items and the cash paid for expenses
• Under accrual accounting, the following may occur:
• Income is recognised without receipt of cash (accrued income)
• Cash is received but income is not recognised (income received in advance)
• Expense is recognised without payment of cash (accrued expense)
• Expense is paid but not recognised as an expense (prepaid expense)

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