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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.15

They are recorded in the accounting records and reported in the financial statements
for the periods to which they relate.

 Case study 1.1 Applying Accrual Concept

Mr S buys clothing of ₹ 5,000 by paying cash ₹ 2,000 and sells it at ₹ 6,000 of which
customers pays only ₹ 5,000.

His revenue is ₹ 6,000 and not cash received amounting to ₹ 5,000. Expense (cost
incurred for the revenue) is ₹ 5,000, and not cash paid amounting to ₹ 2,000. So the
profit based on accrual concept is ₹ 1,000 (Revenue – Expenses).
In the above case, assuming accrual concept is not applied, the profit will be ₹ 3,000
(5,000 – 2,000) which does not reflect the true position.

Exercises 1.2

Q. For the following, identify Answers:
whether an asset or liability is
created:

1. When cash received before sales 1. A liability is created when cash is received
in advance

2. When cash received after sales 2. An asset called trade receivables is
created

3. When cash paid before expense is 3. It creates an asset called “Trade Advance”
incurred when cash is paid in advance

4. When cash paid after expense is 4. It creates a liability called “Payables”
incurred or “Trade payables” or “Outstanding
liabilities”

1.12.5 Matching Concept

If any revenue is recognised, then expenses that are related to earn such revenue
should also be recognised in the financial statements.
Every expense shall not necessarily identify every income. Some expenses are directly
related to the revenue, whereas some are time bound. For example, purchase of direct
material are directly related to sales but salaries, rent, etc. are recorded for a partic-
ular accounting period on accrual basis.

Periodic Revenue - Matched Expenses = Periodic Profit

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