Solution 6.2

Description and purpose of the accruals concept

The purpose of the accruals concept is to ensure that the financial statements reflect accurately what has occurred in the business and that the same principles are adopted by all preparers of financial statements.  The key points relating to the accruals concept are

When calculating net profit, expenses should be matched against related revenues. When accounting for products purchases are matched against sales on a unit bases. Expenses are matched on a time basis.

Net profit is the difference between revenues earned (not necessarily received) and expenses charged (not necessarily paid). For businesses that buy and sell on credit, sales and purchases in the trading account will be a mixture of cash and credit transactions. Also, expenses that relate to a period will be deducted from sales in the calculation of net profit for that period whether or not those expenses have actually been paid. Any unpaid expenses will also be shown in the balance sheet under liabilities.