Accrual Accounting
Definition
Accrual accounting is an accounting method that records revenue and expenses when they are earned or incurred, regardless of when cash actually changes hands.
Explanation
Accrual accounting provides a more accurate picture of a company's financial health than cash accounting. Revenue is recorded when it is earned (the sale is made), and expenses are recorded when they are incurred (the bill is received), even if payment hasn't been received or made yet.
This method follows the matching principle, ensuring that revenues and related expenses are recorded in the same accounting period. Most businesses with inventory or sales on credit are required to use accrual accounting under GAAP.
Example
A web design agency completes a $10,000 project in December but doesn't receive payment until January. Under accrual accounting, the revenue is recorded in December when the work was completed.