<\/p>\n
A lender, for example, might not consider the company creditworthy because of its expenses and lack of revenue. Under cash accounting, income and expenses are recorded when cash is received and paid. In contrast, accrual accounting does not directly consider when cash is received or paid. http:\/\/www.psychology-online.net\/articles\/doc-611.html<\/a> recognizes income and expenses when they are incurred. As its name implies, this method tracks accruals, which could be unpaid expenses or invoices that customers haven\u2019t paid yet. You record income when you earn it and expenses when they are used to produce that income.<\/p>\n<\/p>\n To illustrate, a machine valued at Dh10 million is sold by Company A to its related party Company B at Dh15 million. The latter would capitalise the asset at Dh15 million – i.e., the transaction value and corresponding depreciation expense – in its books of account. For computing taxable profits, however, the depreciation should be done at the cost base of Dh10 million, which is the arm\u2019s length value.<\/p>\n<\/p>\n In this case, it\u2019s obvious that Company Y becomes a debtor to Joe for five years. Therefore, to carry an accurate recording of Joe\u2019s bonuses, the company must make a bonus liability accrual to record these bonus expenses. When the company pays out Joe\u2019s owed bonus, the transaction will be recorded by debiting its liability account and crediting its cash account.<\/p>\n<\/p>\n<\/p>\n
What is accrual accounting? A beginners guide<\/h2>\n<\/p>\n