Help ! Can anyone explain this statement: Accounts Receivable is a good example of Accrual accounting...?

The comparison is to "cash accounting". If I perform a service in the month of July and invoice $20,000 for services rendered on July 31, then my A/R is $20,000. My cash is $Nil.

On an accrual basis, I have earned $20,000. I'm also very likely to receive the $20,000 within a reasonable period of time (say 60 days).

However, on a cash basis, I have "earned" nothing because I only earn money when I receive it.

Thus, the accrual method is much better predictor of what my future cash receipts will be.

It's all literal. AR is money you are expected to receive, usually in the form of an invoice for a performed or contracted service. Accrual . . . to accumulate . . . Your AR account will tell you how many invoices you have accumulated giving you a picture of money expected to come in within a certain time period.

Cash accounting is generally speaking . . . cash in cash out. In broadest terms it only "tells" you the current cash position and does not deal with accumulated contracts or invoices or debt.

It's sort of like this . . . right now you have $100.00 in your checking. But your brother owes you $300.00 which is due 10 days from now. Under the accrual method you would notate the "contract" or debt owed to you with an invoice or journal entry and your financial statements would reflect that $300.00 as an asset . . . so you would have total $400.00 in assets . . $100.00 of it in cash and the remainder in receivables . . . your accounting would record the $300.00 owed to you . . .

Cash accounting (and there are some exceptions) would simply tell you that your balance is $100.00

This statement is related to one of the two standard methodologies used in Accounting to record financial transactions.

In brief, the two methods are :

1. Accrual Basis Accounting

2. Cash Basis Accounting

Accrual Basis means of keeping the business accounts that show expenses incurred and income earned for a financial period (also known as fiscal period). both expenses and income do not necessarily have to be either paid (expense) or received in cash (income) to be reported. Accrual Basis is how most businesses operate to control their working cash balances in addition to even out cash receipts for budgeting purposes.

Cash Basis methodology is in reverse: expenses are only recorded when they are actually paid and Income (Revenue) is earned when the cash is actually received. Cash Basis would be like a garage sale - where cash is paid and received for goods at the moment.

The Accounting for Accounts Receivable is important to a business because of how you report it. usually the Receivables balance is "aged" into specific buckets of days . These Aging reports will allow the business to see what is past due or what is now due or how much is expected to come due. so it works as a schedule of cash coming into the business. If a business needs funds, Banks will look to the Accounts Receivable balance and aging report as part of their analysis of incoming Cash receipts for the business to continue operations.