Accrual Accounting
Accrual accounting records revenue when it's earned and expenses when they're incurred, regardless of when cash actually changes hands. It's the standard method required by GAAP and gives a more accurate picture of a business's financial health than cash-basis accounting.
Accrual Accounting Definition
Accrual accounting records revenue when it's earned and expenses when they're incurred, regardless of when cash actually changes hands. It's the standard method required by GAAP and gives a more accurate picture of a business's financial health than cash-basis accounting.
Accrual Accounting in Practice
A marketing agency completes a $10,000 campaign in March but doesn't get paid until April. Under accrual accounting, the revenue is recorded in March when the work was done. Similarly, if they receive a software bill in March but pay it in April, the expense is recorded in March.
Why It Matters
Accrual accounting shows you what's really going on financially — not just what's in your bank account today. It matches revenue to the period it was earned and expenses to the period they were incurred, making it easier to spot trends and make informed decisions.
Most businesses above a certain size are required to use accrual accounting. Even if you're not required to, it gives you a clearer view of profitability than cash-basis accounting, which can be misleading during months with uneven payment timing.
FAQ
Q: What's the difference between accrual and cash-basis accounting?
A: Cash-basis records transactions when money moves. Accrual records them when they happen. Accrual is more accurate but more complex.
Related Terms
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Related Terms
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