TheTaxHeaven Dictionary - Know the meaning of tax

Accrual Accounting

What is Accrual Accounting? 

Accrual accounting is a method where companies record income and expenses when they are incurred, not when cash is received or paid. It's often compared with cash accounting, which records revenue when cash is received and expenses when cash is paid. 

Find more information about accrual accounting and how it varies from cash accounting, another common accounting method. 

How Does Accrual Accounting Work? 

Accrual accounting records transactions when a service or good is delivered, not when cash changes hands. It provides a more accurate picture of a company's current and future financial health by combining current and future cash flows. 

This method follows the matching principle, meaning revenue and expenses are recorded in the same period they occur. Accrual accounting is recommended by International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Therefore, most companies, except for very small businesses and individuals, use this method. 

Benefits of Accrual Accounting 

Accrual accounting provides a clearer view of a company's current situation, though it's more complex and costly to use. It arose from the need for more accurate financial information as business transactions became more complicated. This method records transactions involving credit sales or long-term projects that generate revenue over time, which affect the company's financial condition when they happen. Thus, it makes sense to record these events in the financial statements for the same period they occur. 

Accrual accounting gives firms immediate feedback on their expected cash inflows and outflows, helping them manage their current resources and plan for the future.