accrualbasis

Accrual basis accounting, also known as accrual accounting, is a method of recording financial transactions when they are earned or incurred, regardless of when cash is exchanged. Revenues are recognized when the company has earned them and collection is reasonably assured, and expenses are recognized when the related goods or services are consumed or liabilities are incurred, not when cash is paid.

Under accrual accounting, the balance sheet and income statement reflect the timing of economic events rather than cash flows. This approach relies on the revenue recognition principle and the matching principle, and it is required by generally accepted accounting principles (GAAP) in many jurisdictions and by International Financial Reporting Standards (IFRS).

Key elements include accounts receivable, accounts payable, accrued expenses, and deferred revenue. Adjusting entries at the end of an accounting period ensure revenues and expenses are recorded in the correct period, including accrued incomes, accrued expenses, depreciation, and amortization.

Advantages include a more accurate depiction of a company’s financial position and performance, better decision-making information, and improved comparability across entities. Limitations include greater complexity, the need for estimates (such as allowances for doubtful accounts and depreciation), and potential misalignment with real-time cash flows.

Usage varies by jurisdiction and entity size. Public companies and many private firms reporting under GAAP or IFRS typically use accrual accounting, while some very small businesses may favor cash basis accounting for simplicity, or use modified accrual in specific sectors (such as government).

Examples: revenue is recorded when a service is performed even if payment is received later; interest accrues over time; wages are recorded as an expense as employees earn them, even if paychecks are issued later.