The accrual principle is an accounting standard that establishes that economic transactions or events were recorded at the time they occurred, regardless of the date of payment or collection.
The objective of the accrual principle is that the annual accounts of a company clearly reflect the assets, the financial situation and the economic results achieved by it in that period, allocating expenses and income to the period in which the annual accounts refer to and affect at the same, regardless of the time of its collection or payment .
Although a company has an income or expense that has not yet been collected or paid, the operation must be accounted for when it is done and not when there is money movement (not when it is collected or paid). Moreover, the principle of accrual ensures that each accounting year, the company leading to the income statement (profit or loss account) only the expenses and income that correspond to the period.
In the case of subsidies, it should be noted that when one is granted, the monetary collection of the same occurs, but its allocation to the income statement should not be made until this subsidy is final: when the requirements established in the own grant of the same.
Example of the accrual principle
Let’s take this example as a sample: in the month of December 2012, the ZZ company sells a fleet of trucks, so the sale will be accounted for in that same year even if the customer pays the following year. Easy to get to this point, but we will complicate the matter a little more.
The same company – the ZZ company – hires an advertising agency to carry out a marketing campaign . These services were provided in November 2012, the date on which the corresponding invoice was issued; however, the contract signed between the company and the advertising agency establishes that payment must be made three months after the invoice is issued, that is, in February 2013.
As we have seen, the accrual principle requires that transactions be recorded according to the actual flow of goods and services, regardless of when they are collected or paid for. In the example that concerns us, taking into account that the service was provided and invoiced in 2012, the accounting record must be produced in 2012 and not at the time of payment, in February 2013.