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Accrual Accounting Definition
Accrual Accounting Definition
Accrual Accounting Definition
Accrual accounting is one of two accounting method, the other being cash
accounting. Accrual accounting measures the performance and position of a
company by recognizing economic events regardless of when cash transactions
occur. (For related reading, see "How Does Accrual Accounting Differ from Cash
Basis Accounting?")
The general idea is that economic events are recognized by matching revenues
to expenses (the matching principle) at the time in which the transaction occurs
rather than when payment is made or received. This method allows the current
cash inflows or outflows to be combined with future expected cash inflows or
outflows to give a more accurate picture of a company's current financial
position.
The need for this method arose out of the increasing complexity of business
transactions and a desire for more accurate financial information. Selling on
credit and projects that provide revenue streams over a long period of time affect
the company's financial condition at the point of the transaction. Therefore, it
makes sense that such events should also be reflected in the financial
statements during the same reporting period that these transactions occur.
Accrual accounting, however, says that the cash method isn't accurate because
it is likely, if not certain, that the company will receive the cash at some point in
the future because the services have been provided. The accrual method
recognizes revenue when the services provided for the client are concluded even
though cash isn't yet in the bank. Revenue will be recognized as earned on Oct.
30. The sale is booked to an account known as accounts receivable, found in the
current assets section of the balance sheet.
A company that incurs an expense that it is yet to pay for will recognize the
business expense on the day the expense arises. Under the accrual method of
accounting, the company receiving goods or services on credit must report the
liability no later than the date they were received. The accrued expense will be
recorded as an account payable under the current liabilities section of the
balance sheet, and also as an expense in the income statement. On the general
ledger, when the bill is paid, the accounts payable account is debited and the
cash account is credited.
Key Takeaways