Accrual Accounting

Accrual accounting is a method of accounting where revenue and expenses are recorded when they are earned or incurred, rather than when cash is actually received or paid. This approach gives a more accurate picture of a company’s financial health by recognizing economic events regardless of cash flow timing. Accrual accounting is the standard method used by most companies, as it provides a more comprehensive view of financial performance, allowing businesses to match revenues with the expenses incurred to generate them.

Example

If a company delivers a product in December but doesn’t receive payment until January, it would record the revenue in December under accrual accounting.