What is accrual accounting?

Accrual accounting is an accounting method that records revenue and expenses when they are earned or incurred, regardless of when cash is actually exchanged. This means that income is recognized when a service is provided or a product is delivered, and expenses are recorded when goods or services are received, not necessarily when cash changes hands. This method provides a more accurate picture of a company's financial performance during a specific period because it aligns revenue and expenses to the time period they affect, thereby adhering to the matching principle in accounting.

This approach contrasts with cash accounting, where transactions are only recorded when cash is received or paid out. By using accrual accounting, businesses can better manage their financial statements and provide a clearer view of their financial position, making it essential for companies that are larger or require external funding or reporting.