Accrual Concept in Accounting: Meaning, Examples, Journal Entries and India Compliance Guide
Quick Summary
- The accrual concept records income and expenses when they are earned or incurred, not when cash is received or paid.
- It gives a more accurate view of business performance by matching income and expenses to their respective periods.
- Accrual accounting is mandatory for companies under Section 128 of the Companies Act, 2013. For income tax purposes, either cash or mercantile accounting is allowed, as long as the method is followed consistently.
- Key accrual-basis adjustments include accrued expenses, accrued income, deferred revenue, and prepaid expenses.
- Accrual accounting differs from cash accounting because it records transactions based on economic activity, not only cash movement.
- Journal entries under accrual accounting follow the double-entry system, where every transaction has both a debit and a credit.
What is the Accrual Concept in Accounting?
The accrual concept in accounting, also called the accrual basis of accounting or the mercantile system of accounting, records income when it is earned and expenses when they are incurred. It does not wait for cash to be received or paid.
For example, if a business completes a service in March but receives payment in April, the income is recorded in March because the service was completed in March. Similarly, if employees work in March but salaries are paid in April, the salary expense is recorded in March because the expense belongs to March.
Basically, revenue is recorded when it is earned, expenses are recorded when they are incurred, income and related expenses are matched to the same accounting period, and lastly receivables, payables, prepaid expenses, and unearned income are properly shown in the financial statements . This method gives a clearer picture of business performance than cash accounting, especially for businesses that sell on credit, buy on credit, pay expenses later, receive advances, or manage long-term contracts.
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Is Accrual Accounting Mandatory in India?
This is one of the most important questions, and the answer depends on the type of entity and the law being applied. The regulatory landscape is basically as follows:
Companies Act, 2013
For companies in India, accrual accounting is mandatory. Section 128 of the Companies Act , 2013 requires every company to maintain books of account on an accrual basis and according to the double-entry system of accounting. This applies to private limited companies, public limited companies, one person companies, and Section 8 companies. This means companies cannot maintain their statutory books purely on a cash basis.
Income-tax Act, 2025
For income tax purposes, the position is different. The Income-tax Act, 2025 came into force from 1 April 2026. Section 145(1) states that income chargeable under “Profits and gains of business or profession” or “Income from other sources” may be computed using either the cash system or mercantile system, provided the method is regularly followed.
Businesses must follow a consistent method of accounting for tax purposes. Companies generally maintain accrual based books because company law requires it. Other taxpayers may follow cash or mercantile accounting, subject to applicable tax rules, notified standards, and consistency.
Indian Accounting Standards (Ind AS)
Ind AS applies to specified companies and entities in accordance with the applicable roadmap and regulatory requirements. Ind AS 1 requires financial statements, except for cash flow information, to be prepared on an accrual basis of accounting. This means entities covered by Ind AS must prepare their financial statements on an accrual basis.
GST and Accrual
GST doesn’t operate solely on cash or accrual accounting. GST liability is determined by the time-of-supply rules under the CGST Act. For goods, Section 12 of the CGST Act provides that tax liability arises at the time of supply . The law refers to invoice and payment timing, but Notification No. 66/2017 provides relief from payment of GST on advances received for the supply of goods.
Unlike goods, GST liability for services remains linked to the earlier of invoice or payment, meaning tax must be paid on advances received for services under Section 13. Therefore, businesses should not assume that every accounting accrual automatically creates GST liability. Accounting entries, tax invoices, receipt vouchers, GSTR-1, GSTR-3B and GSTR-2B should be reconciled properly.
Importance of the Accrual Concept in Accounting
In accounting, accurately capturing a business's financial performance is important. The accrual concept is important because it shows business performance more accurately than cash movement alone.
Accurate Profit Measurement
Accrual accounting records income and related expenses in the same period. This helps calculate the real profit or loss for that period. For isntance, if a business earns revenue in March but receives payment in April, recording the revenue in April would understate March income and overstate April income. Accrual accounting avoids this mismatch.
Better View of Receivables and Payables
A business may have strong sales but delayed collections. It may also have unpaid supplier bills or salary liabilities. Accrual accounting shows these pending receivables and payables in the books, helping owners understand what is due to come in and what needs to be paid.
Better Business Decisions
Accrual reports help business owners answer practical questions that are especially useful for businesses that sell on credit, purchase inventory on credit, or manage monthly fixed expenses. These include questions such as: How much revenue was actually earned this month? Which expenses belong to this period? How much money is yet to be collected? What liabilities are pending? Is the business profitable or only temporarily cash-rich?
- Audit and Compliance Readiness
Accrual-based books create a stronger audit trail because expenses, income, receivables, payables, and adjustments are recorded in the correct period. Companies need to comply since its also a statutory requirement under the Companies Act, 2013.
Better GST Reconciliation
Accrual accounting helps businesses maintain cleaner records of sales, purchases, receivables, payables, tax invoices, and input tax credit . However, GST liability should still be assessed separately under the time-of-supply rules and return-filing requirements.
4 Common Accrual-Basis Adjustments
1. Accrued Expenses
Accrued expenses are costs that belong to the current accounting period but have not been paid yet. In simple words, the business has already taken the benefit, but payment will happen later. For example, assume employees have earned ₹50,000 salary for March, but the salary will be paid on 5 April. Since the salary relates to March, it should be recorded in March itself. This keeps the profit for March accurate and also shows that the business has an outstanding liability.
Journal Entry - When salary is accrued in March
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 31 Mar 2026 | Salary Expense A/c Dr | 50,000 | |
| To Salary Payable A/c | 50,000 |
Being salary for March accrued but not yet paid.
When salary is paid in April
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 5 Apr 2026 | Salary Payable A/c Dr | 50,000 | |
| To Bank A/c | 50,000 |
Being accrued salary for March paid in April.
2. Accrued Income
Accrued income is income that has been earned but not yet received or invoiced. Here, the business has already completed the work, so the income should not wait until cash is received. For example, suppose a service business completes work worth ₹1,00,000 in March but raises the invoice in April. The revenue belongs to March because the service was completed in March. Until the invoice is raised, the amount is shown as accrued income.
Journal Entry - When service is completed in March
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 31 Mar 2026 | Accrued Income A/c Dr | 1,00,000 | |
| To Service Revenue A/c | 1,00,000 |
Being service revenue earned in March but invoice not yet raised.
When invoice is raised in April
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1 Apr 2026 | Trade Receivables A/c Dr | 1,00,000 | |
| To Accrued Income A/c | 1,00,000 |
Being accrued income transferred to customer receivable on invoice generation.
When payment is received
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 15 Apr 2026 | Bank A/c Dr | 1,00,000 | |
| To Trade Receivables A/c | 1,00,000 |
Being payment received from customer.
3. Deferred Revenue
Deferred revenue, also called unearned revenue, is money received before goods or services are delivered. At the time of receipt, it is not treated as income because the business still has to provide the service. Suppose a company receives ₹12,000 in April for a 12-month software subscription. The full amount should not be counted as April revenue. Instead, it is first recorded as a liability and then recognised gradually as the service is provided each month.
Journal Entry - When advance is received
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1 Apr 2026 | Bank A/c Dr | 12,000 | |
| To Deferred Revenue A/c | 12,000 |
Being advance received for 12-month subscription.
Monthly revenue recognition
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 30 Apr 2026 | Deferred Revenue A/c Dr | 1,000 | |
| To Service Revenue A/c | 1,000 |
Being one month’s subscription revenue recognised.
4. Prepaid Expenses
Prepaid expenses are payments made in advance for benefits that will be used in future periods. The payment has gone out, but the full expense does not belong to the month of payment. For example a business pays ₹60,000 in January for a 12-month insurance policy. Since the insurance cover is used over the full year, only ₹5,000 should be treated as expense each month. The remaining amount stays as a prepaid asset until it is consumed.
Journal Entry - When insurance premium is paid in January
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1 Jan 2026 | Prepaid Insurance A/c Dr | 60,000 | |
| To Bank A/c | 60,000 |
Being insurance premium paid in advance for 12 months.
Monthly adjustment entry
At the end of every month, ₹5,000 is transferred from prepaid insurance to insurance expense.
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 31 Jan 2026 | Insurance Expense A/c Dr | 5,000 | |
| To Prepaid Insurance A/c | 5,000 |
Being one month’s insurance expense recognised.
Key Principles Related to Accrual Accounting
1. Matching Principle- The matching principle says that expenses should be recorded in the same period as the revenue they help generate. Suppose a sales campaign runs in March and generates sales in March, then the advertising expense should be recorded in March, even if the agency invoice is paid later.
2. Revenue Recognition- Revenue is recognised when it is earned, not necessarily when cash is received. For service income, revenue is generally recognised when the service is performed or when the related contractual obligation is satisfied. For Ind AS entities, revenue recognition is governed by Ind AS 115, Revenue from Contracts with Customers. For non-Ind AS companies, Accounting Standard AS 9, Revenue Recognition provides the relevant guidance, wherever applicable.
3. Going Concern Principle- The going concern principle assumes that a business will continue operating for the foreseeable future. This supports accrual accounting because many assets, liabilities, revenues, and expenses relate to future periods.
4. Prudence- Prudence means businesses should not overstate income or assets and should not understate expenses or liabilities.For example, if a customer is unlikely to pay, the business may need to recognise a provision for doubtful debt instead of showing the full receivable as fully recoverable.
Financial Statements under Accrual Accounting
1. Profit and Loss Statement- The profit and loss statement shows income earned and expenses incurred during the period. It does not depend only on cash received or paid.
2. Balance Sheet- The balance sheet shows: trade receivables , accrued income, prepaid expenses, trade payables, salary payable, interest payable, deferred revenue, and other outstanding liabilities.
3. Cash Flow Statement- The cash flow statement explains actual cash movement. This is important because accrual profit and cash balance are not the same. A business can show profit but still face cash pressure if customers have not paid on time.
Reversing Entries in Accrual Accounting
A reversing entry is made at the beginning of the next accounting period to reverse an accrual recorded at the previous period-end. Reversing entries are useful when there is a risk that the actual invoice, salary payment, or expense entry may be recorded again in the next period. They are not always mandatory, but they are a good control practice for recurring accruals.
Example of Reversing Entry
If March salary of ₹50,000 was accrued on 31 March, the entry may be reversed on 1 April.
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1 Apr 2026 | Salary Payable A/c Dr | 50,000 | |
| To Salary Expense A/c | 50,000 |
Being March salary accrual reversed at the start of the next period.
When the actual salary is paid, the normal salary payment entry can be recorded. This helps avoid double-counting the same expense.
Cash Accounting vs Accrual Accounting
| Parameter | Accrual Accounting | Cash Accounting |
|---|---|---|
| Revenue recorded | When earned | When cash is received |
| Expense recorded | When incurred | When cash is paid |
| Financial accuracy | Gives a clearer view of performance | Can distort profit due to timing differences |
| Receivables and payables | Recorded properly | May not be fully visible |
| Cash visibility | Needs cash flow statement | Directly shows cash movement |
| Compliance | Required for companies under Companies Act, 2013 | May be used by certain non-company taxpayers if regularly followed |
| Complexity | More detailed | Simpler |
| Useful for | Companies, growing businesses, credit-based businesses, and audited entities | Small businesses and professionals where permitted and suitable |
Being March salary accrual reversed at the start of the next period.
When the actual salary is paid, the normal salary payment entry can be recorded. This helps avoid double-counting the same expense.
How Accrual Accounting Works: Step-by-Step
Accrual accounting records the financial effect of a transaction after business activity. This allows financial statements to show earnings, amount owed, amount due, and pending benefits from prepaid expenses. For example, sale made on credit is recorded as revenue even before the customer pays, or advance money received from a customer is recorded as a liability until goods or services are delivered. Check the steps to be followed for accrual accounting:
Step 1: Identify the Transaction
Check whether income has been earned or an expense has been incurred.
Step 2: Decide the Correct Accounting Period
Record the transaction in the period to which it relates.
Step 3: Pass the Journal Entry
Record the debit and credit entry based on the nature of the transaction.
Step 4: Update the Ledger
Post the entry to the relevant ledger accounts, such as Salary Payable, Accrued Income, Deferred Revenue, or Prepaid Expense.
Step 5: Review at Period-End
At month-end or year-end, review pending expenses, unbilled income, advances, prepaid expenses, and provisions.
Step 6: Prepare Financial Statements
Prepare the profit and loss statement , balance sheet, and cash flow statement.
Step 7: Reconcile with GST and Tax Records
Match books with sales invoices, purchase invoices, GST returns, GSTR-2B , receivables, payables, and bank records.
Common Mistakes in Accrual Accounting
- Recording Revenue Before It Is Earned- Revenue should not be recorded only because an advance has been received. If goods or services are not delivered yet, the amount should usually be treated as deferred revenue .
- Forgetting Accrued Expenses- If unpaid expenses are missed, profit may be overstated.
- Not Reversing Accruals Where Needed- If accrual entries are not reversed or adjusted properly, the same expense may be counted twice.
- Confusing Accrued Income with Trade Receivables- Accrued income is income earned but not yet invoiced. Trade receivable usually arises after an invoice is raised.
- Treating GST the Same as Accounting Accrual- GST liability depends on time-of-supply rules , not only on accounting entries.
- Not Reviewing Prepaid Expenses- If prepaid expenses are not adjusted every month, expenses and assets may be misstated.
Best Practices for Accrual Accounting
- Record accruals at every month-end or quarter-end instead of waiting until year-end.
- Maintain separate ledgers for accrued expenses, accrued income, prepaid expenses, deferred revenue, and provisions.
- Use clear narration in every journal entry.
- Reconcile accrued expenses with actual invoices when they are received.
- Review old receivables and create provisions where recovery is doubtful.
- Track advances received from customers separately from earned revenue.
- Review prepaid expenses monthly.
- Use reversing entries where they help avoid duplicate booking.
- Reconcile accrual-based profit with cash flow every month.
- Match accounting records with GST returns , invoices, and bank statements.
- Use accounting software to automate recurring entries, reminders, reports, and reconciliation checks.
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Conclusion
The accrual concept in accounting records income when it is earned and expenses when they are incurred, not when cash is received or paid. It gives a more accurate view of business performance because revenue and related expenses are matched to the correct accounting period.
For businesses looking to implement accrual accounting correctly, BUSY's financial accounting software automates period-end accruals, tracks receivables and payables, generates financial statements, and reconciles GST records, keeping your books accurate and audit-ready without manual follow-up.
Accrual accounting is mandatory for companies under Section 128 of the Companies Act, 2013. For income tax purposes, either cash or mercantile accounting is allowed, as long as the method is followed consistently. For Ind AS entities, financial statements are prepared on an accrual basis, except cash flow information.
Accrual accounting is especially important for businesses that deal with credit sales, credit purchases, unpaid expenses, advances, prepaid expenses, GST reconciliation , and audited financial statements. To maintain accurate accrual-based books, businesses should record period-end adjustments, review receivables and payables, reconcile GST records, and monitor cash flow regularly.
