Accrual Accounting

Definition

Your company delivered Rs 20 lakh worth of software services in March. The client will pay in May. Under accrual accounting, that Rs 20 lakh is March revenue, period. It doesn't matter that the cash hasn't arrived. You earned it in March, so it shows up in March's books. The same logic applies to expenses: your team used AWS servers all through March, but Amazon won't invoice until April. That server cost is a March expense. This matching of revenue and expenses to the period they actually belong to (regardless of when cash moves) is the fundamental principle. And for any company governed by the Companies Act, 2013, it's not optional.

Ind AS provides the detailed playbook. Revenue recognition follows Ind AS 115 (Revenue from Contracts with Customers), which replaced the older AS 9. Expense recognition, depreciation schedules, lease accounting, all follow specific Ind AS standards. Where GST adds a wrinkle is timing: tax liability arises on the earlier of the date of supply or the date of payment receipt. This often aligns with accrual recognition, but not always, creating timing differences that must be tracked in monthly returns. Most finance teams we've worked with find the GST-accrual reconciliation the most tedious part of monthly close.

The practical entries that make accrual accounting work are straightforward but easy to get wrong. Accrued revenues: services delivered but not yet billed. Deferred revenues: cash collected for services you haven't delivered yet (advance payments). Accrued expenses: goods received but vendor invoice not yet in hand. Prepaid expenses: insurance premium paid annually but expensed monthly. These adjusting entries happen at period-end and get reversed at the start of the next period. Skip them or get them wrong, and your P&L is misstated, your balance sheet is off, and your GST, TDS, and income tax computations are built on bad numbers. That's how penalties happen.

Key Points

• Revenue is recorded when earned, expenses when incurred, not when cash changes hands. That's the core principle.
• Mandated by the Companies Act, 2013, for all companies maintaining books of accounts.
• Ind AS 115 governs revenue recognition from customer contracts, replacing the earlier AS 9 standard.
• GST timing differences arise because tax liability triggers on date of supply OR payment receipt, whichever is earlier.
• Key accrual entries: accrued revenues, deferred revenues, accrued expenses, and prepaid expenses, all adjusted at period-end.
• Wrong or missing accruals distort financial statements and cascade into incorrect GST, TDS, and income tax calculations.