Accrual Accounting

What Is Accrual Accounting?

Accrual accounting is an accounting method that records income and expenses when they are earned or incurred, rather than when cash is actually received or paid. This approach reflects financial activity at the time transactions occur.

Accrual accounting is widely used by businesses because it provides a clearer picture of financial performance.

Why It Matters

Accrual accounting helps businesses understand their true financial position by matching income with the expenses required to generate that income. This method provides a more accurate view of profitability over time.

Many larger businesses and corporations are required to use accrual accounting for financial reporting.

How Accrual Accounting Works

Under accrual accounting:

revenue is recorded when it is earned
expenses are recorded when they occur

This means financial records may include income that has not yet been received or expenses that have not yet been paid.

Example

A company completes work in December but receives payment in January. Under accrual accounting, the income is recorded in December when the work was performed.