Accrual accounting is a method of financial reporting where revenues and expenses are recorded when they are earned or incurred, regardless of when the actual cash transactions take place. This approach aims to provide a more accurate picture of a company’s financial performance and position over a specific period.
In accrual accounting, revenue is recognised when it is earned, meaning when goods are delivered or services are performed, even if the payment has not been received yet. Similarly, expenses are recorded when they are incurred, irrespective of when the payment is made.
This method contrasts with cash accounting, where transactions are only recorded when cash changes hands. Accrual accounting is widely used by businesses to reflect a more comprehensive view of their financial activities and obligations, providing a more accurate representation of the company’s financial health.