1.3.1 Accrual Basis

The accrual basis of accounting recognizes revenue when realized and expenses when incurred. It refers to all revenues and costs which incurred in the current period, whether or not the payment is received or paid, treated as the income and expenses of the current period. On the contrary, those that do not belong to this period of income and expenses, even if the amount is received or paid in this period, shouldn’t be treated as income or expenses of the current period.

Under the accrual basis, the criteria for the recognition of revenues are as follows: The process to earn revenue is completed and the authority to receive payment is obtained，but not the money has been collected. Similarly, under the accrual basis, the criteria for the recognition of expenses are the related benefits have been enjoyed and the obligation of payment has been assumed, and rather not the payments have been paid. For example, employees’ wages should be recognized as expenses in the period when employees provide service to the company, but not to recognize until the wages are paid. Therefore, accrual basis is a standard taking whether have obtained the authority of receiving payment or assumed the payment obligation as the criterion to recognize revenues and expenses. It could reflect the operating performance of enterprises in different periods more reasonably.

The accrual basis requires numerous adjustments at the end of an accounting period. For example, if revenue has been collected in advance, such as rent received in advance, at the end of the accounting period,the accountant should judge which part can be recorded as revenue, which part relates to the future periods and must, therefore, be deferred to those period and be considered a liability.

Above all, we can dig out that the use of the accrual basis complicates the accounting process. Then why do we use it? That’s because the measurement result of an entity’s financial condition and operating performance based on accrual basis is more representative than that based on cash basis. Meanwhile, if without accrual basis, it would be unnecessary to make the time period assumption.

Cash basis accounting is to deal with economic transactions, and to recognize revenues and expenses according to whether actually receipt or payment of money has incurred. Based on cash basis, if payment is actually paid during one period, regardless of whether it bring benefits to the company in the current period,it should be recognized as cost or expense. If cash is actually received during one period, regardless of whether it’s earned during this period, it should be treated as revenue.

In practice, immaterial items are frequently handled on cash basis, and some specific standards also allow the application of cash basis. In China, accrual basis is required to use.

知识拓展1-2

权责发生制与收付实现制的区别举例

假设零售企业M在去年发生了以下业务。

（1）购买了20万元的商品，款项暂时未付。

（2）支付供应商18万元的货款。

（3）赊销卖出商品30万元。这些商品于去年购买，购买成本为10万元。

（4）收到去年赊销给客户的商品款16万元。

（5）应支付销售部门的员工工资为5万元，但尚未实际付款。

上述业务经处理后的结果如下。

不难看出，按照权责发生制（accrual basis），M是盈利的（profitable），但按照收付实现制（cash basis），M是亏损的（loss-making）。因此，收付实现制不能真实地反映企业的经营活动，并可能误导（mislead）财务信息的使用者。

The accrual basis indicates a profitable business by $150 000, whereas the cash basis indicates a loss of $20 000. Accordingly, the cash basis fails to truly reflect the business activities and would mislead financial information users.