What does "accrual accounting" entail?

Accrual accounting is a method that focuses on recognizing revenues and expenses when they are incurred, rather than when cash is exchanged. This means that a company records income when it is earned—such as when a product or service is delivered—and expenses when they are incurred—such as when a product is received or a service is used. This approach provides a more accurate picture of a company's financial condition and performance over time, as it reflects all economic activities relevant to the period, regardless of the timing of cash flows.

By using accrual accounting, businesses can align their revenue with related expenses within the same accounting period, facilitating better analysis of financial performance and helping stakeholders make informed decisions based on a more comprehensive view of the financial activities within a company.

This method contrasts with cash accounting, which tracks revenues and expenses only when cash is actually received or paid out. This key distinction is what makes accrual accounting essential for businesses that aim to match revenues with the expenses incurred to generate them, ensuring that financial statements provide a true and fair view of the company's status at any given time.