When creating a Chart of Accounts, is it appropriate to lump all type of payables (liabilities) as a single category known as Accruals?

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

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The "chart of accounts" in accounting refers to a complete lis of accounts that are used by the accounting system of a firm. These accounts are divided in four broad categories - assets, liabilities, income and expenses.  Liability refers to the amounts that is owed by the firm to others. This includes the the payables, or the amount that the company owes to its suppliers.

Accruals is a concept that is independent of classification of accounts in these categories. It is a concept that is related to the status of any particular item of income or expense.

We can identify three states of any income or expense. These are incurred, due, and accrued. We can understand this taking example of interest charges. When a company takes a loan on interest, the interest charges are calculated from the day the loan is taken, and the amount of interest keeps on increasing every day. But the company does not pay the interest every day. The terms of loan taken may require the interest on the loan is to be repaid every quarter, In this the loan becomes due for payment only at the end of each quarter, however the amount of loan keeps on accruing throughout. Thus the have the concept of interest accrued and interest due. Interest due at a particular time may not be paid exactly when due. When the interest is actually paid, it becomes interest incurred.

For the purpose of calculating the profit and loss and preparing the balance sheet the accounts follow the system of either accrued or incurred income and expense. Irrespective of the system followed by a company in this respect, there is no change in accounts of the company relating to accounts payable. And most certainly there is no category or group of accounts in a typical chart of accounts called accruals, as accruals can pertain to either expenses or income, which are two very different groups of accounts.

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