Understanding Accrual Basis of Accounting
Unlike the rest of the world, accountants live by a different set of rules. Once of those rules will dictate much of your school life:
THE ACCRUAL BASIS OF ACCOUNTING
If I had to explain this in very simple terms:
Instead of using money, let’s use a supremely easier example to understand. Now imagine you were doing one of Genshin Impact’s world quests with arguably best boi Kazuha and emergency snack Paimon.
Let’s say you did a quest that rewarded you with Mora (ka-ching!). According to the accrual basis of accounting, do you earn that income when you:
A) Complete the objective
B) Complete the objective AND turn in a quest?
And the answer is...
A! According to the accrual basis of accounting, it doesnt matter when we get the cash. What are are concerned about is when can we consider that we've earned it and can record it. As such, once you've accomplished your objectives, you've effectively earned the income :)
Defining the accrual basis of accounting
The accrual basis of accounting states that:
Business activities that have OCCURRED, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.
The key word to pay attention to here is OCCURRED.
When you’ve been hired to do a service, you record income (which is different from getting paid) when the service has been complete.
So the moment you complete the task you’re been asked to do, you’ve earned it! And when you earned your income, record it :) Let’s do the double entry:
Dr income receivable (receivable because the money hasnt been received from the quest giver yet)
Cr income (income went up)
