The practice of record keeping by which income is recorded when earned and expenses are recorded when incurred, even though the cash may not be received or paid out until later.

A current liability representing the amount owed by a business to a creditor for the merchandise or services purchased on open account.

Money owed a business enterprise for merchandise bought on open account.

Accrual basis of accounting is based upon generally accepted accounting principles. It recognizes income when it is earned and not when it the cash received and recognizes expenses when they are owed and not when you pay them. Accrual basis of accounting includes Accounts Receivable, Accounts Payable, and Inventory. The practice of record keeping by which income is recorded when earned and expenses are recorded when incurred, even though the cash may not be received or paid out until later.

These are expenses incurred during an accounting period for which payment has not been made.

Income earned during a fiscal period but not actually received during that fiscal period.

These are liabilities which have occurred, but have not been paid during an accounting period. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable.

Materiality

• The relevance of information is affected by its nature and materiality.
• In some cases, the nature of information alone is sufficient to determine its relevance.
• In other cases, both the nature and materiality are important...
• Information is material if its omission or misstatement could influence the economic decistions of users taken on the basis of the financial statements.

Reliability

• To be useful, information must also be reliable.
• Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.
• Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading.

Faithful representation

• To be reliable, information must represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent.
• Most financial information is subject to some risk of being less than a faithful representaion of that which it purports to portray.
• This is not due to bias

Substance over form

• If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accoundance with their substance and economic reality and not merely their legal form.
• The substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form.

Neutrality

• To be reliable, the information contained in financial statements must be neutral, that is, free from bias.
• Financial statements are not neutral if they influence the making of a decision of judgement in order to achieve a predetermined result or outcome.

Prudence

• The preparers of financial statements do, however, have to contend with the uncertainties that inevitably surround many events and circumstances...
• Such uncertainties are recognised by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements.
• Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty

Completeness

• To be reliable, the information in financial statements must be complete within the bounds of materiality and cost.
• An omission can cause information to be false or misleading and thus unreliable and deficient in term of its relevance.

• Users must be able to compare the financial statements of an entity through time in order to indentify trends in its financial postion and performance.
• Users must also be able to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position.
• Hence, the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an entity and over time for that entity and in a consistent way for different entities.

Going concern

• The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.
• Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations;
• if such an intention or need exists, the finacial stetements may have to prepared on a different basis and, if so, the basis used is disclosed.

Accrual basis

• Financial statements are prepared on the accrual basis of accounting.
• The effects of tranacations and other events are recognised when they occur and they are recorded in the accounting records and reported in the financial statements of the period to which they relate.
• ...inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
• Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions.