What is the accrual basis?
Published
The accrual basis is the principle that revenue is recorded when earned and expenses when consumed, regardless of when cash moves. A sale is recorded on the day goods are delivered, not the day payment arrives; a cost is recorded on the day it is consumed, not the day it is paid.
The two rules
Revenue is recorded when: goods are delivered or the service is performedExpense is recorded when: the benefit is consumed, matched to the revenue it helped produce
The second rule is the matching principle: a period's costs are set against that period's revenue, otherwise the profit measure means nothing.
A worked comparison
Three June transactions at Al-Waha:
- Goods sold for SAR 30,000 (excluding VAT) on 20 June, collected 15 July.
- A supplier invoice for SAR 18,000 received 25 June, paid 10 July.
- SAR 22,000 collected in June for a sale made in May.
| Accrual basis (June) | Cash basis (June) | |
|---|---|---|
| Revenue | 30,000 | 22,000 |
| Expense | (18,000) | 0 |
| Result | 12,000 profit | 22,000 profit |
The cash basis shows SAR 10,000 more profit, because it recorded a collection relating to a prior period and ignored a cost genuinely consumed. Neither figure is arithmetically wrong - but only the accrual figure measures June's performance.
Why it is the required basis
- Statutory financial statements are prepared on the accrual basis under the applicable accounting standards.
- Saudi VAT attaches to the date of supply and issuance of the tax invoice, not the date of collection - meaning you declare output VAT on an invoice you have not yet been paid for.
- Banks, investors, and auditors read accrual statements.
- The cash basis shows neither receivables nor payables, the two largest components of working capital.
The adjusting entries accrual demands
| Entry | Purpose |
|---|---|
| Accrued expenses | Costs consumed but not yet invoiced |
| Prepaid expenses | Payments not yet consumed |
| Deferred revenue | Money collected for a service not yet delivered |
| Depreciation | Spreading an asset's cost across its life |
| Doubtful debt provision | Estimating what will not be collected |
| End-of-service provision | An obligation accruing with service |
Without these entries, the system is running on a cash basis with accrual labels.
Frequently asked questions
Can both bases be used together?
In practice yes, and it is common: books are kept on the accrual basis for the statements while liquidity is tracked through the cash flow statement. But formal statements are prepared on one basis.
Does accrual accounting complicate daily work?
Inside an accounting system, no. Posting a sales invoice creates the revenue and the receivable automatically. The additional effort is confined to period-end adjusting entries.
When is revenue recognised on a long service contract?
As delivery progresses - not in full at signing, and not on collection. An annual maintenance contract of SAR 60,000 is recognised at SAR 5,000 per month.
How does accrual relate to cash flow?
Accrual measures performance; cash flow measures liquidity. Both are necessary: Al-Waha earned SAR 27,250 on the accrual basis while its cash fell SAR 9,000 in the same quarter.