Understanding the accrual principle – The development of accounting in Indonesia is getting better every year. This was marked by the government issuing Government Accounting Standards (SAP) in 2015. In SAP there is an accrual principle. The accrual principle is an economic transaction that is recorded, presented and recognized in the form of financial statements when making transactions, regardless of cash receipts.
Currently, the accrual basis as a basis that is commonly used by companies, both large companies and small companies. The main reason is because the accrual basis is able to provide a more precise picture of the company’s performance, so that the company can make policies that are more relevant for the future.
Definition of Accrual Principle
The following is an understanding of the accrual principle quoted from several sources.
Accrual principle accounting is the process of recording accounting relating to income and expenses without regard to cash receipts and disbursements.
The accrual principle of accounting is a system that determines costs and revenues for a particular year’s book, even though the new year’s book is realized in the following year’s book.
Government Accounting Standards (SAP)
Accrual principle accounting is a principle of accounting that records financial statements regarding debt, assets, expenses and equity.
So, it can be said that the accrual principle is a method that provides a financial picture of a company. Accrual accounting is used to measure debt, capital, assets and retained earnings that shareholders need to know in order to develop a company’s investment in the future.
Accrual-based accounting is part of the International Best Practice in managing modern finance with the principles of New Public Management (NPM) and prioritizing transparency and accountability in the financial management process.
The application of the accrual-based recognition principle has unique consequences, including in the recording of the following two types of transactions:
- Advance cash payments should be recorded as an asset, not as an expense even if in the future the payment turns into an expense. The asset will only turn into a cost when the benefits of the asset are consumed.
- Cash receipts in advance (advance payments) should be recorded as liabilities (payable) not as income, even though in the future these receipts will turn into income. This liability will only be recorded as income when the business unit has provided its services or products.
Accrual Principle Concept
Accrual-based accounting has 2 main concepts, including:
The concept of revenue recognition on an accrual basis is that there are companies that have the right to collect the results of activities at the company. If entered on an accrual basis, the timing of cash receipts is considered less important.
So, the accrual basis will usually appear with an estimate of bad debts, because the recognized income has not yet received cash.
The concept of recognizing expenses on the accrual basis is that when the required payment has occurred, it is assumed that an expense has been started, even though the expense has not been paid.
Accrual Based Recording Model
Taking into account the benefit principle and others, there are two models of recording based on the accrual-based recognition principle as follows:
Pure Accrual Based Recording
Accrual-based recording is applied in accounting both during the current period and when the financial statements are prepared.
Semi Accrual Based Recording
Accrual-based recording is applied in accounting only when preparing financial statements. In other words, during the current period the accounting records are recorded using a card basis, and at the end of the period changes are made so that the cash basis becomes an accrual basis.
Benefits of Accrual Basis
According to Van Der Hoek (2005), the benefits of accounting methods that apply the accrual principle include:
- Support company performance management.
- Facilitate better financial management.
- Improve understanding of program costs.
- Expand and improve resource allocation information.
- Improve financial reporting.
- Facilitate and improve asset management including cash.
Differences in Accrual Basis and Cash Basis Accounting
The differences between accrual basis accounting and cash basis include the following:
Time of Recording of kKas
Recording uses accrual basis accounting to record bad debts even though the company’s cash condition has not yet received it. This is recorded at the beginning because the company’s inventory or stock has been reduced, so that it is used as income.
Whereas cash accounting is the opposite because it does not record uncollectible accounts but records at the end are made when there is an income or expenditure in the company’s cash.
By using the accrual basis, the company will experience the risk of income from uncollectible accounts which take quite a long time to collect. Meanwhile, on a cash basis, the company will not experience any income risk from bad debts because receivables have not been converted into income on a cash basis.
By using the accrual basis, companies will be able to present financial reports with more accurate data information and are preferred by many companies. Meanwhile, the cash basis cannot present accurate data information because it only shows the financial position at that time.
In using the accrual basis the company will input it 2 times, usually known as ” double entry “. While the cash basis is inputted 1 time or single entry when cash is actually received.
With an accrual basis, the recording becomes very detailed and in-depth, and can present real time such as COGS, margins and current profit. Meanwhile, using a cash basis, HPP records are less actual, which makes analyzing margins unclear.
Recording of Purchase Orders
Hearing the term PO or known as ” purchase order ” using accrual basis accounting according to accounting standards can be used as turnover or billing in the future. Meanwhile, if there is a PO on a cash basis, it is not valid because the cash basis does not turn the PO into turnover or billing at a later date.
In PSAK 1 there is an appeal from the government for every company to be able to use the accrual basis of accounting method because this accrual basis recognizes revenues, expenses, assets and debts as well as capital and retained earnings needed by shareholders for the development of company investments.
The accrual basis since 2015 has also been used as a government accounting standard which is considered more accountable and transparent. As for cash basis accounting, the position is replaced by the accrual basis accounting method.
Comparison of Cash Base and Accrual Basis
Each basis of accounting has advantages and disadvantages of each. The following details the comparison of cash basis and accrual basis:
Excess Cash Base
Cash-based accounting certainly has advantages and disadvantages. The advantages of cash based accounting are:
- Relatively simple so easy to understand and explain.
- The audit process is easier.
- It’s easier to control spending.
- Cash-based financial reports can show sources of funds, allocation and use of cash sources.
- Easy to understand and explain, preparers of financial statements do not require detailed knowledge of accounting and do not require judgment when determining the amount of cash flows for a period.
Lack of Cash Base
- Only focusing on cash flow in the current reporting period and ignoring the flow of other resources that may affect the company’s ability to provide goods and services now and in the future so that it is vulnerable to cash flow manipulation.
- The statement of financial position (balance sheet) cannot be presented, because there is no double entry recording so that you can never know the position and financial risk ( blind spot accounting ).
- Unable to provide information on service fees as pricing, policies for control and evaluation of performance.
- Encourage the tendency to spend until the budget runs out.
- There is no coordinated control of non-cash assets through accounting.
- Assets neglected or not used effectively.
- Swelling debt and bankruptcy risk are not detected through accounting and financial reports.
Advantages of the Accrual Principle
The following are some of the advantages of the accrual principle:
- When making decisions, produce financial reports to be more detailed and recorded.
- Determination of the cost of resources will be known more deeply and accurately.
- There is a more detailed assessment of performance in the annual report, because the assessment is linked to company performance.
- The accrual method can produce better cash holdings, liabilities and asset values.
- Can measure the assessment in a better activity.
- Changing the financial behavior of its users to be more transparent and accountable.
- More effective auditing because accrual accounting provides clear and coherent records.
- Align or equalize capital expenditure with depreciation accounting.
- Better cost assessment measurement of a program or activity.
- Can result in better value of assets, liabilities and equity.
- A more accurate assessment of performance in one reporting year because the assessment of financial health is linked to company performance.
- Resource allocation can be known more accurately.
- Generate better financial reports for decision making purposes.
Disadvantages of the Accrual Principle
Behind the advantages, there must be disadvantages that must be known before using the accrual basis method. Following are some of the disadvantages of the accrual principle, namely:
- When using the accrual basis, it will usually be more complex. So it really needs Human Resources (HR) who are competent in understanding accounting.
- The relevance of the accrual basis will be more limited.
- Having an unpaid income risk, so that it will have an effect on reducing the company’s income.
- The company will be less precise about the timing of cash payments, because it is not focused on that.
- With the formation of reserves will be able to reduce the company’s income.
- The company does not have a precise estimate of when cash that has not been paid by other parties can be received.
Considerations Using the Accrual Principle
If a company wants to use the accrual principle, it must pay attention to the following things first, including:
This can be assessed based on the turnover earned by a company in a year when using the cash basis, then you can switch to the accrual basis in the following year.
Pay attention to the type of business you are in so you can determine whether the accrual basis is the right accounting method to use or not.
After registering for VAT, Matobers had to be more careful in using the accounting method for companies by looking at the long-term credit terms.
Time of Sale and Payment
In this consideration can be seen from the time of sale. This can help you determine the right accounting method.
Accrual Example of Expenses / Expenses
One simple example of accruals from accounting expenses is the accrual of liabilities and expenses. Both of these accruals can be used as a major improvement that occurs at the end of the accounting month. However, all of these bills are not paid until the bill can be received in the first month of the following year.
This is done so that the annual financial reports that occur can be complete. For this reason, a number of things are needed in carrying out this one method, including:
- The company’s income statement for the current year, this report must also be able to report repair costs.
- Balance sheet on the last day of the current year and must report the related liabilities.
- Income statement for the current year. The report should also report repair costs.
In recording these accruals, entries must be made so that they can adjust the debit for repair costs and also credit accrued costs.
Income Accrual Example
For an example of this revenue accrual, we can look at the electricity company, Matobers. For example, in December companies tend to use natural gas or coal so that not many employees use electricity for customers in December.
However, the utility didn’t latch on to the electric service until its meter readings increased in January. So the financial statements require accrual adjustments and cause several conditions, namely:
- The income statement in December and the current year will report all the revenue that the electricity company gets.
- The balance sheet on December 31 will report all current assets for amounts due to customers. This includes the amount of electricity provided in December.
- Later, the accrual adjustment will debit all current assets of uncollectible accounts and will credit the profit and loss statement from the existence of electricity income which previously existed.
So, if Matobers sells a product or service on credit. Then the sales will be recorded in the book based on the invoices obtained. There is a possibility that you have not received your cash payment in a certain time.
A fee will be recorded when raw materials have been ordered. Not when actual payment is made to the supplier by cash or check. So, the only flaw in this accounting system is that Matobers has to pay income tax even if you haven’t received the income.
By using the accrual method, the accounting expenses can be offset by the income contained in the income statement. This will also provide a better picture of the company’s financial condition.
So that’s an explanation of the meaning, types and benefits of the accrual principle , right, garmeds. If later the Matobers company will use the accounting method, then it must consider various things that will be applied in the company so that it does not suffer losses and all expenses and income can be recorded in detail.
If there is a Matobers company that has limited partnership liability, it can use the accrual principle in order to provide a clearer financial picture for a particular company. I hope this article inspires you!