accrual accounting

Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid.

📘 Definition

Accrual Accounting recognizes financial events regardless of when cash transactions occur.

This method gives a more accurate picture of a company’s financial position, especially over time.

📊 Key Principles
Concept Description
Revenue Recognition Revenue is recorded when earned, even if payment hasn't been received.
Expense Recognition Expenses are recorded when incurred, even if not yet paid.
Matching Principle Match revenues with related expenses in the same period.
🧾 Example

Suppose a company provides services in September but gets paid in October:

Under accrual accounting: Revenue is recorded in September (when service is performed).

Under cash accounting: Revenue would be recorded in October (when cash is received).

✅ Advantages

Gives a complete view of income and expenses.

Matches revenue with the costs used to earn it.

Required by GAAP and IFRS for most large businesses.

❌ Disadvantages

More complex than cash accounting.

May require more adjustments and estimates (e.g., depreciation, provisions).

Doesn’t show actual cash flow.

🆚 Accrual vs. Cash Accounting
Feature Accrual Accounting Cash Accounting
Timing When earned/incurred When cash is received/paid
Accuracy More accurate long-term picture Simpler but less accurate
Complexity More complex Simple
Used by Medium to large businesses Small businesses, freelancers
📌 Common Accruals

Accrued Revenues – Revenue earned but not yet received (e.g., accounts receivable).

Accrued Expenses – Expenses incurred but not yet paid (e.g., salaries, interest).

Prepaid Expenses – Paid in advance for future benefit (e.g., insurance).

Unearned Revenue – Cash received for services not yet performed.