What is Accrual Accounting?

Accrual Accounting records revenues and expenses when they are earned or incurred, not when cash is received or paid. This method provides a clearer picture of a business’s financial health.

How Accrual Accounting Works

  • Revenue Recognition: Revenue is recorded when earned.

  • Expense Recognition: Expenses are recorded when incurred, regardless of cash payment timing.

Example

A consulting firm completes a $10,000 project in December but receives payment in January. The income is recorded in December.

Benefits

  • Aligns income and expenses within the correct period

  • Provides accurate financial reporting

  • Required under GAAP and IFRS standards