Accrual Accounting
Recording revenue and expenses when earned or incurred, regardless of when cash is received or paid.
What is Accrual Accounting?
Accrual accounting is the standard method of recording financial transactions at the time they are earned or incurred, rather than when cash changes hands. Revenue is recognized when a product is delivered or a service is performed, and expenses are matched to the period they relate to. This matching principle gives investors a more accurate picture of a company's profitability than cash-basis accounting, which only records transactions when money moves. GAAP and IFRS both require accrual accounting for publicly traded companies.
Example
Microsoft ships software licenses in December and invoices customers, but many pay in January. Under accrual accounting, Microsoft records the revenue in December when the licenses are delivered, not in January when cash arrives — ensuring the income statement reflects the correct period's performance.
Source: FASB Accounting Standards Codification — Revenue Recognition (ASC 606)