Accrual Method
The accounting approach recognizing economic events regardless of when cash transactions occur, recording revenue when earned and expenses when incurred.
Accrual Method
An accounting approach that recognizes economic events regardless of when cash transactions occur, recording revenue when earned and expenses when incurred, to more accurately reflect financial performance within specific time periods.
For instance, when a retail store sells $5,000 of merchandise on credit in December, accrual accounting records the sale in December, not when the customer pays in January. Similarly, employee wages earned in one month but paid in the next are recorded as expenses in the month earned.
The accrual method follows fundamental accounting principles including the matching principle and revenue recognition principle. It provides a more complete view of financial position and performance by capturing obligations to pay and rights to receive cash in the future. Financial statements prepared under this method better represent economic reality but may differ significantly from cash position. Most medium and large businesses, all publicly traded companies, and organizations with inventory or significant credit transactions must use accrual accounting for financial reporting, though some may use cash basis for tax purposes.