Definition
Accrual accounting is a method of recording Revenue and Expenses based on when they are earned or incurred, respectively, rather than when cash is exchanged. This contrasts with Cash-Basis Accounting. It aims to provide a more accurate picture of a company’s operational performance during a specific period.
Two core principles underpin accrual accounting:
- Revenue Recognition Principle: Revenue should be recognized in the financial statements when the underlying goods or services are delivered (and thus earned), regardless of when the cash payment is received from the customer.
- Matching Principle: Expenses incurred to generate revenue must be recorded in the same accounting period as the revenue they helped to earn. This ensures costs are appropriately matched with the benefits (revenue) they generate.
Used primarily in the Income Statement. See also: Financial Statements, US GAAP