Accrual accounting is an accounting method that measures the performance and position of an organization by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of current financial condition.
Accrual accounting gives an accurate real-time picture of the organization's financial health.
Cash basis accounting might show positive cash flows in spite of high delayed expenses. This is impossible with accrual basis accounting, because accrual basis accounting keeps track of both income and expenses as they occur. Daily reports can be pulled to show a company's real level of profit at any given time. Together, the same reports reveal the company's financial health over a period of time.
Real-time reports balance expenses to generated revenue.
Scheduling payments is easy when real-time reports show clearly what expenses are currently outstanding. It is just as easy to see what revenue is still owing to the organization. Thus, accrual basis accounting saves time three ways. The organization no longer has to post payments and receipts on the back end. Nothing can fall through the cracks, so nothing has to be tracked down later.
Accrual accounting prevents poor accounting practices.
Cash-strapped organizations sometimes borrow from one delayed expense, such as payroll or the pension fund, to pay other expenses which are currently coming due. Cash basis accounting may conceal this warning sign. Accrual basis accounting shows it clearly, as well as whether the trend is worsening.
Adoption of Accrual Accounting System in AICTE
AICTE will adopt the accrual accounting system from the financial year 2013-14. AICTE has implemented the Tally ERP 9.0 software for its accounting system and ready to develop the cost management system for purchases and to control its expenditures.