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Accrual basis accounting is a method of recording and reporting financial transactions based on the accrual principle.
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According to this principle, revenues and expenses are recognized when they are earned or incurred regardless of when the corresponding cash inflows or outflows occur.
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In accrual accounting, the focus is on matching revenues with the expenses associated with generating those revenues, providing a more accurate depiction of the company's financial performance and position.
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Under the accrual basis, revenues are recognized when the following two criteria are met.
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The revenue is earned.
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This means that the goods have been delivered or the services have been performed.
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Or the revenue is realized.
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This means that there is a reasonable expectation of receiving payment for the goods or services.
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Expenses, on the other hand, are recognized when the following two criteria are met.
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The expenses incurred.
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This means that the goods or services have been received or consumed.
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Or the expenses matched with revenues that help generate...