Accrual Accounting

Recording revenues and expenses when earned or incurred, not when cash moves.

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Accrual accounting is a method of recording financial transactions when they are earned or incurred, regardless of when the actual cash payment is made or received. It is the most widely used accounting method for businesses and is required under GAAP for companies above a certain size.

In depth

Unlike cash accounting, which only records transactions when money changes hands, accrual accounting gives a more accurate picture of a company's financial health at any given point. Revenue is recognized when it is earned, and expenses are recorded when they are incurred — even if no cash has moved yet. This makes it easier to match income with the costs associated with generating it, a principle known as the matching principle.

Accrual accounting is especially important for businesses that deal with credit sales, long-term contracts, or recurring expenses. It ensures that financial statements reflect the true economic activity of a period, making them more reliable for investors, lenders, and management decisions.