Accruals Basis
An accounting method that records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.
What is Accruals Basis?
The accruals basis of accounting (also called accrual accounting) recognizes revenues when they are earned and expenses when they are incurred, regardless of the timing of cash flows. This contrasts with cash basis accounting, which records revenues and expenses only when cash changes hands. Accruals-basis accounting provides a more accurate picture of a company's financial performance because it matches revenues to the expenses incurred to generate them. GAAP requires all public companies to use accrual accounting for financial reporting. Key accrual entries include accounts receivable (revenue earned but not yet collected), accounts payable (expenses incurred but not yet paid), prepaid expenses, deferred revenue, and accrued liabilities.
Example
A consulting firm completes a $50,000 project in December but does not receive payment until January. Under accruals-basis accounting, the $50,000 revenue is recorded in December when the service is performed (debit accounts receivable, credit revenue). Under cash basis accounting, the revenue would only be recorded in January when payment arrives. The accruals basis gives December financial statements a true picture of the work performed that month — critical for investors assessing the firm's actual performance versus its cash timing.