Accounting Dictionary

Accrual Basis

Accrual accounting is an accounting method used by large companies. To use it you add all sales made in an accounting period and deduct all expenses incurred in an accounting period to arrive at net income.

In December a department store’s customers paid $10,000 in cash for merchandise. The customers charged $90,000 of merchandise. The store paid salaries of $5000 on December 17th. The employees earned salaries of $10,000 for the last two weeks of the year, but these salaries won’t be paid until January. Using accrual accounting, the year’s sales total $100,000 which includes all sales made even if the store hasn’t yet received the money. The payroll is $15,000 which is all payroll expense incurred even though the store hasn’t paid all of it yet. The net income would be $90,000 – 15,000 = $85,000.

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