Accrual Basis Accounting
The accounting method that records revenues and expenses when earned or incurred regardless of cash timing, providing a more accurate picture of financial performance.
Accrual Basis Accounting
The accounting method that records revenue when earned (when goods are delivered or services performed) and expenses when incurred (when resources are consumed), regardless of when cash changes hands.
For example, a consulting firm using accrual accounting would record $10,000 in revenue upon completing a project in March, even if the client doesn’t pay until April. Similarly, it would record $2,000 in utility expenses for March even if the bill is paid in April.
Accrual accounting follows the matching principle by recording transactions in the periods they occur economically rather than when cash flows, providing a more accurate picture of financial performance. Required by GAAP for most organizations beyond a certain size, this method uses accounts like accounts receivable, accounts payable, accrued expenses, and deferred revenue to bridge timing differences between economic events and cash flows. While offering better performance measurement, accrual accounting requires more complex record-keeping than cash basis accounting.