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Cost accounting basics

Define accrual accounting:

Speaking in great generalities, accrual accounting seeks to bring all of the proper accounting transactions into the proper accounting period of time.

Let’s use an example.

You send someone a bill for work that you completed in January, and you receive and deposit their payment for the work in March. When is that transaction income to you? Is it in January when you did the work or in March when you received the payment?

On an accrual basis, we would pick that up as income in January, when it was earned. Coincidentally, this is also when it was billed. We would do this through counting your accounts receivable as income, picking it up inside the correct time period. If we were doing your accounting on a cash basis, then we would pick up the income in March, when the payment was received.

Entire books have been written about this concept. It’s not this simple, but I’m sure that you get the basic concept.

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