Accruals basis
1. Financial reporting - accruals concept
In financial reporting, the appropriate spreading of income and expenditure into the periods to which they relate.
This spreading may differ from the period in which the cash receipt or payment actually takes place.
- Example: Spreading payment over two years
- A customer pays GBP 100k for a service that runs for two years. GBP 100k is paid at the beginning of the first year.
- Reporting this amount in the income statement on an accruals basis means the GBP 100k would be spread over the two year service period, so GBP 50k in Year 1 and GBP 50k in Year 2, rather than reporting the total payment of GBP 100k in Year 1 only.
(An alternative - simpler - basis of accounting is a receipts and payments basis - usually only used for small entities, for example not-for-profit clubs.)
2. Financial reporting - hedging.
In financial accounting for hedging instruments, the spreading of profits and losses on the hedging instruments over the life of the underlying exposure being hedged.
This accounting treatment is an application of the accruals concept.
3. Tax.
A basis of taxation which follows the accruals basis of financial accounting.
In the UK, the Companies Act 2006 requires directors to ensure that annual accounts give a true and fair view.
Accruals accounting would almost invariably be required, in order to give a true and fair view.
Loan relationship income is taxed on an accruals basis for UK tax purposes.
4. UK tax.
The recognition for UK tax purposes of all profits and losses on a loan relationship over the life of the loan.
