ACCRUAL CONCEPT The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they become receivable. Though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses. The accrual concept under accounting assumes that revenue is realised at the time of sale of goods or services irrespective of the fact when the cash is received. For example, a firm sells goods for Rs 55000 on 25th March 2005 and the payment is not received until 10th April 2005, the amount is due and payable to the firm on the date of sale i.e. 25th March 2005. It must be included in the revenue for the year ending 31st March 2005. Similarly, expenses are recognised at the time services provided, irrespective ACCOUNTANCY MODULE - 1 Notes Accounting Concepts Basic Accounting 28 of the fact when actual payment for these services are made. For example, if the firm received goods costing Rs.20000 on 29th March 2005 but the payment is made on 2nd April 2005 the accrual concept requires that expenses must be recorded for the year ending 31st March 2005 although no payment has been made until 31st March 2005 though the service has been received and the person to whom the payment should have been made is shown as creditor. In brief, accrual concept requires that revenue is recognised when realised and expenses are recognised when they become due and payable without regard to the time of cash receipt or cash payment. Significance l It helps in knowing actual expenses and actual income during a particular time period. l It helps in calculating the net profit of the business.

MATCHING CONCEPT The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept. Let us study the following transactions of a business during the month of December, 2006 (i) Sale : cash Rs.2000 and credit Rs.1000 (ii) Salaries Paid Rs.350 (iii) Commission Paid Rs.150 MODULE - 1 Basic Accounting Notes 29 Accounting Concepts ACCOUNTANCY (iv) Interest Received Rs.50 (v) Rent received Rs.140, out of which Rs.40 received for the year 2007 (vi) Carriage paid Rs.20 (vii) Postage Rs.30 (viii) Rent paid Rs.200, out of which Rs.50 belong to the year 2005 (ix) Goods purchased in the year for cash Rs.1500 and on credit Rs.500 (x) Depreciation on machine Rs.200 Let us record the above transactions under the heading of Expenses and Revenue. Expenses Amount Revenue Amount Rs Rs 1. Salaries 350 1. Sales 2. Commission 150 Cash 2000 3. Carriage 20 Credit 1000 3000 4. Postage 30 2. Interest received 50 5. Rent paid 200 3. Rent received 140 Less for 2005 (50) 150 Less for 2007 (40) 100 6. Goods purchased Cash 1500 Credit 500 2000 7. Depreciation on machine 200 Total 2900 Total 3150 In the above example expenses have been matched with revenue i.e (Revenue Rs.3150-Expenses Rs.2900) This comparison has resulted in profit of Rs.250. If the revenue is more than the expenses, it is called profit. If the expenses are more than revenue it is called loss. This is what exactly has been done by applying the matching concept. Therefore, the matching concept implies that all revenues earned during an accounting year, whether received/not received during that year and all cost incurred, whether paid/not paid during the year should be taken into account while ascertaining profit or loss for that year. Significance l It guides how the expenses should be matched with revenue for determining exact profit or loss for a particular period. l It is very helpful for the investors/shareholders to know the exact amount of profit or loss of the business. ACCOUNTANCY MODULE - 1 Notes Accounting Concepts Basic Accounting 30 INTEXT QUESTIONS 2.9 Fill in the blanks with suitable wo