ACCRUAL

METHOD OF
ACCOUNTING
TOPIC OUTLINE:

 Concept of Matching Principle

 Three Applications of Matching Principle
 Essence of Accrual Accounting
 Accrual Accounting vs. Cash Accounting
 Advantages and Disadvantages
 MATCHING PRINCIPLE

Profit is obtained by matching revenue

for the period with the expenses incurred
in earning that revenue.
Three Applications:

1. Cause and Effect Association

2. Rational Allocation
3. Immediate Recognition
Cause and Effect Association

Under this principle, the expense is

recognized when the revenue is
already recognized.
Systematic and Rational Application

Under this principle, some costs are

expensed by simply allocating them
over the periods benefited.
Immediate Recognition

Under this principle, the cost incurred is

expensed outright because of
uncertainty of future economic benefits
or difficulty of reliably associating
certain costs with future revenue.
 ACCRUAL ACCOUNTING

Recognizestransactions and events

when revenues are earned and
expenses are incurred.
 ESSENCE OF ACCRUAL
ACCOUNTING
It provides a more accurate
picture of a company’s
financial position.
 ACCRUAL VS. CASH

 Example:

Company A, consulting company, provides a P5,000 service

to a client on Oct. 30. The client received the bill for services
rendered on Oct. 30 and made a cash payment on Nov. 25.
CASH METHOD

 On October 30:
No Entry….

 On November 25:
Cash 5,000
Service Revenue 5,000
ACCRUAL METHOD

 On October 30:

Accounts Receivable 5,000

Service Revenue 5,000

 On November 25:
Cash 5,000
Accounts Receivable 5,000
 Advantage Disadvantage

Cash Method Simplicity It might overstate the health of

the company but has a large
sum of debt

Accrual Method it includes accounts receivables it doesn't track cash flow and,

and payables and, as a result, is
a more accurate picture of the
profitability of a
company, particularly in the
long term.
as a result, might not account
for a company with a major
cash shortage in the short term,
despite looking profitable in
the long term.