Accrual

Accrual is an accounting concept that records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. This method contrasts with cash accounting, which recognizes transactions only when cash is received or paid. Accrual accounting provides a more accurate picture of an entity’s financial performance and position by matching economic events with the periods they affect.

In practice, accruals involve two main types of adjustments: accrued revenues and accrued expenses. Accrued revenue arises when a company delivers goods or services but has not yet billed the customer; the revenue is recognized and recorded as a receivable. Conversely, accrued expense occurs when a company has incurred costs, such as wages or utilities, but has not yet made the corresponding payment; the expense is recorded with a liability.

The accrual basis is required by most accounting frameworks, including Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), for publicly traded entities. It is also the preferred method for internal management reporting, as it reflects ongoing operations more reliably than cash flow alone.

Accrual accounting supports the revenue recognition principle, which dictates that revenue should be recognized when it is both earned and realizable. Similarly, the matching principle requires that expenses be recorded in the same period as the related revenues they help generate. By adhering to these principles, accrual accounting enhances comparability across periods and entities, aiding investors, regulators, and other stakeholders in evaluating financial health.