The Case for an Income-Oriented Concept of Accruals

SYNOPSIS

The dominant current concept of accruals is that accruals are the changes in all noncash assets and liabilities. This paper argues that an income-oriented concept of accruals better captures the essential role of accruals in shifting the recognition of cash flows into accrual income across time, aiming to create a better measure of firm performance than cash income. Although the income-oriented concept of accruals is internally consistent with the asset/liability concept, it offers two major additional advantages. First, it clarifies that it is the accrual process that drives the temporary changes in noncash assets and liabilities and not the converse. Second, the income-oriented concept of accruals clarifies the critical distinction between offset accruals and true accruals. Establishing these two advantages brings conceptual clarity about the nature and function of accruals and helps to answer a number of vexing problems in accounting.

JEL Classifications: M40; M41.