Accrual Accounting

Financial Accounting Intermediate

Accrual accounting records revenues and expenses when they are earned or incurred, not when cash is received or paid.

Explanation:
This method gives a more accurate picture of a company’s financial position. It’s used by businesses that follow generally accepted accounting principles (GAAP) or IFRS.

Recognizes revenue when it’s earned (not received)

Recognizes expenses when they’re incurred (not paid)

Example:
A design agency delivers a project worth $5,000 in March but receives payment in April. The revenue is recorded in March under accrual accounting.

Importance:
Accrual accounting helps match income and expenses in the correct period, giving a more accurate view of profitability and financial health.

Common Confusion:
People often confuse it with cash basis accounting, where transactions are recorded only when money changes hands.