Accrual accounting is a financial accounting method that records revenue and expenses when they are earned or incurred, regardless of when the payment is received or made. This method differs from cash accounting, which records transactions only when cash is exchanged.
Accrual accounting follows the matching principle, which states that revenues and expenses should be recognized in the same period. This method uses double-entry accounting, which means that every transaction has two entries, a debit and a credit, to ensure that the books are always balanced.
Accrual accounting is the preferred method according to Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) . It provides a more accurate and comprehensive view of a companys financial position and performance than cash accounting, which only records transactions when cash is exchanged.
Accruals are revenues earned or expenses incurred that impact a companys net income on the income statement, although cash related to the transaction has not yet been exchanged. Examples of accruals include unpaid invoices for services provided or expenses that have been incurred but not yet paid.
In summary, accrual accounting is a method of accounting that records revenue and expenses when they are earned or incurred, regardless of when the payment is received or made. It follows the matching principle and uses double-entry accounting to ensure that the books are always balanced. Accruals are revenues earned or expenses incurred that impact a companys net income on the income statement, although cash related to the transaction has not yet been exchanged.
