Accrual Concept in Accounting: Meaning, Example and Indian Law
- The accrual concept records income when it is earned and expenses when they are incurred, even when cash moves later.
- Every company in India must keep its Companies Act books on the accrual basis, with matching debits and credits for each entry.
- Income-tax law permits the cash system or accrual system, called the mercantile system in the law, for specified types of income when the chosen method is followed regularly.
- Goods and Services Tax (GST) follows separate time-of-supply rules, which determine when GST becomes payable.
- Accrual profit is not cash in the bank. Businesses must track collections and payments separately.
A business can report a profit and still struggle to pay its bills. This happens when sales are recorded before customers pay, while salaries, rent and suppliers still need to be settled. The accrual concept helps owners see what the business earned, what it owes and what customers still owe at the end of a period.
This guide is for Indian small-business owners, accounts teams, students and professionals. It covers the accrual concept, common year-end entries, journal entries, the main Indian legal requirements and the difference between accounting and GST timing. It does not cover the complete Ind AS 115 revenue model, reverse-charge GST, vouchers, changes in GST rates or contract-specific accounting.
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What Is the Accrual Concept in Accounting?
The accrual concept means recording income when it is earned and expenses when they are incurred, rather than only when money is received or paid.
Accounting Standard (AS) 1 lists accrual, going concern and consistency as the three fundamental accounting assumptions. For entities that apply Indian Accounting Standards, paragraph 27 of Indian Accounting Standard (Ind AS) 1 requires financial statements, apart from cash-flow information, to use the accrual basis.
Revenue Recognition
An invoice does not automatically create revenue. Under Ind AS 115, a promise to transfer goods or services to a customer is called a performance obligation. Revenue is recognised when the business fulfils that promise by transferring control, meaning the customer can decide how the goods or services are used and receive their benefits. Revenue from a service is recognised at one point or over time, depending on the contract and the work performed.
Expense Recognition and Matching
An expense is recorded when the business receives or uses the related benefit. March rent belongs to March because the premises were used in March, even if payment is made in April.
Direct costs are matched with the related revenue where the accounting rules require it. Other costs are charged when the benefit is used or another recognition rule applies. Read more about the matching concept.
Common Accrual and Deferral Examples
Timing adjustments appear in many routine business transactions. The correct treatment depends on whether the income or expense belongs to the current period or a future period.
| Business Situation | Classification | Period-End Treatment |
|---|---|---|
| Interest has been earned on a deposit but has not yet been credited | Accrued income | Record the income and an asset |
| Electricity has been used but the supplier’s bill has not arrived | Accrued expense, also called an outstanding expense | Record the expense and a liability |
| A customer pays an annual maintenance fee before the coverage period begins | Deferred income, also called deferred revenue | Record a liability and recognise income as the service is provided |
| A business pays for a 12-month software subscription in advance | Prepaid expense | Record an asset and charge the cost over the subscription period |
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Accrued income and prepaid expenses create assets. Accrued expenses and deferred income create liabilities at the reporting date. For a detailed explanation of advance payments, see deferred revenue and prepaid expenses.
Worked Example and Journal Entries
Mehta Consultants closes its books on 31 March. It completes a project and raises an invoice for ₹1,00,000 plus GST on 28 March. The client pays on 15 April. March salary of ₹40,000 and March rent of ₹10,000 are paid on 5 April.
Assume the service qualifies as March revenue, Mehta Consultants is responsible for charging GST, and the business has no other income or expenses.
| Date | Entry | Debit | Credit | Purpose |
|---|---|---|---|---|
| 28 March | Trade Receivables | ₹1,00,000 plus GST | Record the customer balance | |
| 28 March | Service Revenue | ₹1,00,000 | Record March income | |
| 28 March | Output GST Payable | Actual GST charged | Record the tax liability | |
| 31 March | Salary Expense | ₹40,000 | Record March salary | |
| 31 March | Accrued Salary Payable | ₹40,000 | Record the unpaid liability | |
| 31 March | Rent Expense | ₹10,000 | Record March rent | |
| 31 March | Accrued Rent Payable | ₹10,000 | Record the unpaid liability | |
| 5 April | Accrued Salary and Rent Payable | ₹50,000 | Clear the liabilities | |
| 5 April | Bank | ₹50,000 | Record the payment | |
| 15 April | Bank | ₹1,00,000 plus GST | Record the receipt | |
| 15 April | Trade Receivables | ₹1,00,000 plus GST | Clear the customer balance |
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The simplified March profit is:
₹1,00,000 revenue - ₹40,000 salary - ₹10,000 rent = ₹50,000 profit before tax.
The April payments do not create new expenses or revenue. They clear balances recorded in March. GST collected for the government is credited to the output-tax liability in this example, not to service revenue.
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Use journal vouchers to record approved accrual adjustments, then review their effect in ledgers and financial statements.
Is Accrual Accounting Compulsory in India?
The rule depends on the type of entity and the purpose of the accounts.
| Entity or Purpose | Rule in 2026 |
|---|---|
| Company books | Section 128(1) of the Companies Act, 2013 requires every company to keep its statutory books (accounting records required by the Act) on the accrual basis and under the double-entry system where every entry has matching debits and credits. The section contains no turnover or inventory threshold. |
| Limited Liability Partnership (LLP) books | Section 34(1) of the Limited Liability Partnership Act, 2008 permits cash or accrual accounting and requires the double-entry system. |
| Income-tax computation | Section 276(1) of the Income-tax Act, 2025, as amended by the Finance Act, 2026 permits the cash or mercantile system for business or professional income and income from other sources, provided the system is regularly employed. |
| Entities applying Ind AS | Ind AS 1 requires financial statements, except cash-flow information, to be prepared on the accrual basis. |
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The Income-tax Act, 2025 took effect on 1 April 2026. Its cash-or-mercantile choice applies to income-tax computation and does not override the law governing the entity.
Which Accounting Method Should a Business Use?
Where the law permits a choice, accrual accounting gives a clearer view when the business sells on credit or has unpaid expenses at year-end. Cash accounting is simpler where customers and suppliers settle transactions immediately.
The method used for income tax computation must be applied consistently. Check the law governing the entity and consult a Chartered Accountant before adopting or changing the method.
Income-Tax Deductions Allowed Only on Payment
Book recognition and income-tax deduction do not always happen in the same year. Section 37 of the Income-tax Act, 2025 allows specified expenses to be deducted only when they are paid, regardless of the accounting method. The section covers items such as certain taxes, employer welfare contributions, specified interest and delayed payments to micro or small enterprises.
Section 37(3) provides a return-filing-date relaxation for most listed items. It does not extend that relaxation to delayed payments covered by section 37(2)(g) for micro or small enterprises. A business must therefore reconcile book expenses with tax deductions before filing its return.
Why GST and Accounting Dates Can Differ
Accounting decides when income is recorded in the books. GST rules decide when the tax must be reported and paid. These dates do not always match.
| Type of Sale | When GST Usually Arises |
|---|---|
| Services | Usually on the earlier of payment or a timely invoice. If the invoice is issued late, the date on which the service was provided can determine the GST timing. |
| Goods | When the invoice is issued or becomes due. For an ordinary sale of goods, a registered business does not pay GST merely because it receives an advance. |
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In the worked example, the service invoice is issued on 28 March, so the GST liability arises in March even though the customer pays in April.
These rules come from sections 12 and 13 of the Central Goods and Services Tax Act, 2017. The advance-payment rule for goods is provided by Notification 66/2017-Central Tax.
Reverse charge, vouchers and changes in GST rates follow separate timing rules and should be checked for the specific transaction.
How to Record Year-End Accruals
- Find accrued income. Identify goods delivered or services completed before year-end that have not been billed.
- Find accrued expenses. Review salary, rent, utilities, interest and professional fees relating to the closing period but not yet recorded.
- Review deferrals. Keep customer advances as deferred income and unused advance payments as prepaid expenses.
- Post and document the entries. Record each amount in the correct period and retain its calculation and supporting records.
- Clear each balance once. When the invoice, receipt or payment is recorded, clear the existing balance so the income or expense is not counted twice.
- Review tax timing separately. Income-tax deductions and GST timing do not automatically follow the accounting entry.
Benefits and Limitations of Accrual Accounting
Benefits
- Connects income and expenses to the correct period, making results easier to compare.
- Shows the amounts customers owe and the obligations the business still needs to settle.
Practical Limits
- Depends on complete records and supportable estimates.
- Must be reviewed alongside bank balances and expected collections because accounting profit is not cash available for payment.
Businesses that need stronger control over receivables, payables and period-end entries can evaluate BUSY accounting software against their accounting and compliance workflow.
Conclusion
Accrual accounting gives owners a clearer view of performance, but the balances it creates require active review. Receivables, accrued expenses and tax-timing differences should not remain in the books without support. Review each balance when the related invoice, payment or receipt is recorded. Before carrying balances forward, confirm that every accrual is supported, reconciled and assigned to the correct period.
