What Is Accrual Accounting?
Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash transactions occur.
Key Takeaways
- Definition: An accounting method that records revenues and expenses when they occur.
- Purpose: To provide a more accurate picture of a company’s financial position.
- Contrast: Differs from cash accounting, which records transactions only when cash changes hands.
Benefits of Accrual Accounting
- Accuracy: Provides a more accurate financial picture by matching revenues with related expenses.
- Compliance: Required by GAAP and IFRS for most businesses.
- Financial Insight: Offers better insight into a company’s performance over time.
Key Concepts in Accrual Accounting
- Revenue Recognition Principle: Revenues are recorded when earned.
- Matching Principle: Expenses are recorded when incurred to generate revenues.
Importance of Accrual Accounting
Accrual accounting is crucial for understanding a company’s long-term financial health, as it includes all earned revenues and incurred expenses, offering a complete view of financial performance.
