Accrual Accounting
Accrual accounting records income and expenses when they are earned or incurred, not when cash changes hands. It shows up across the ledgers as receivables, payables, prepaids and accruals. It matters because it matches revenue to the costs that produced it, giving a truer picture of profit — and it is the basis Indian company law requires for maintaining books of account.
What Is Accrual Accounting?
Accrual accounting recognises the economic event, not the cash movement. A sale made on credit is income the day the goods are delivered, even though payment may come 30 days later; a March electricity bill is a March expense even if it is paid in April. The system uses receivables, payables, prepaid expenses and accrued liabilities to bridge the gap between when value is exchanged and when money actually moves.
For a Gurugram company this is not optional. Section 128 of the Companies Act 2013 requires books to be kept on the accrual basis and the double-entry system. That means the financial statements reflect obligations and entitlements as they arise, which is exactly what a lender, investor or auditor needs to judge performance. It is more work than tracking a bank statement, but it is the only basis that shows what a business truly earned and owed in a period.
Key terms
- Cash Accounting — The simpler basis recognising only cash received or paid.
- Accounts Payable — Accrued amounts owed to suppliers at period-end.
- Accounts Receivable — Income earned but not yet collected from customers.
What Accrual Accounting Includes and Excludes
The accrual basis deliberately counts economic events and ignores the timing of cash, which is what makes it comparable across firms:
- Includes credit sales — Revenue earned on credit is recognised at delivery, appearing as a receivable.
- Includes incurred costs — Expenses are recorded when incurred, even if unpaid, appearing as accruals or payables.
- Includes prepaids and deferrals — Cash paid or received in advance is spread over the periods it relates to.
- Excludes cash timing — Whether an invoice is paid early or late does not change when income or expense is recognised.
- Why it aids comparison — Because it strips out cash-timing quirks, two firms can be compared on genuine performance, not on who paid when.
How Accrual Accounting Works in the Books
The accrual basis is applied through routine and period-end steps:
- 1Record the transaction when it happens
A credit sale or credit purchase is booked at the point of delivery, creating a receivable or payable.
- 2Raise accruals for incurred costs
At period-end, expenses incurred but not billed — like accrued interest — are recognised.
- 3Defer advances
Income received or expense paid in advance is carried forward as deferred income or a prepaid asset.
- 4Match revenue and expense
Costs are aligned to the revenue they generated so profit reflects the period fairly.
- 5Reverse in the next period
Accrual and prepaid entries are reversed or released as the cash actually flows, avoiding double counting.
Accrual Accounting: A Practical Example
| Particulars | Amount (INR) | Treatment |
|---|---|---|
| Services delivered in March, billed March | 5,00,000 | Revenue in March (receivable) |
| Cash received in April | 5,00,000 | Settles the receivable; not new revenue |
| March rent, paid April | 80,000 | Expense in March (accrued liability) |
| March profit impact | 4,20,000 | Revenue less accrued rent, all in March |
A Gurugram consultancy delivers ₹5,00,000 of work in March and pays its ₹80,000 March rent only in April. On the accrual basis, both belong to March: the fee is revenue when earned, and the rent is an accrued expense when incurred. The March profit of ₹4,20,000 reflects what actually happened that month, even though the cash for both moves in April. Cash accounting would wrongly push everything into April.
end adjustments are skipped:
Accrual Accounting Under Indian Accounting Rules
Section 128 of the Companies Act 2013 requires every company to keep its books of account on the accrual basis and the double-entry system — accrual is the statutory default, not a choice. The 'accrual' assumption is also one of the fundamental accounting assumptions in AS 1 (Disclosure of Accounting Policies) and is embedded throughout Ind AS 1. Recognition of specific items then follows the relevant standard, such as AS 9 / Ind AS 115 for revenue.
- Section 128, Companies Act 2013 — Mandates accrual, double-entry books for every company.
- AS 1 / Ind AS 1 — Treat accrual as a fundamental accounting assumption underlying the statements.
- AS 9 / Ind AS 115 — Apply the accrual principle to the timing of revenue recognition.
Common Mistakes With Accrual Accounting
The accrual basis fails when period-end adjustments are skipped:
- Booking income on receipt — Waiting for cash to record a credit sale delays revenue → recognise it at delivery as a receivable.
- Forgetting accruals — Omitting incurred-but-unbilled costs overstates profit → raise accrual entries at period-end.
- Not deferring advances — Treating an advance as immediate income overstates revenue → carry it as deferred income.
- Never reversing entries — Leaving last period's accruals in place double-counts when cash flows → reverse or release them next period.
Accrual accounting records income and expenses when they are earned or incurred, not when cash changes hands. It shows up across the ledgers as receivables, payables, prepaids and accruals. It matters because it matches revenue to the costs that produced it, giving a truer picture of profit — and it is the basis Indian company law requires for maintaining books of account.
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