Accrual Accounting

What is the accrual principle of accounting?

Accrual accounting is a method in which revenue and expenses are recognized when they are earned and incurred, regardless of when the cash is exchanged. It differs from cash accounting, which recognizes revenues and expenses when the cash is exchanged.

Distinguish between cash basis and accrual basis of accounting

The two main methods of accounting are the cash basis and the accrual basis. The cash basis measures income when cash is received and expenses when cash is paid out. The accrual basis measures income when income is earned and expenses when they are incurred, regardless of when the cash changes hands.

Why do we use accrual accounting?

Accrual accounting enables companies to match revenues and expenses in the same period. The main reason we use accrual accounting is to provide a more accurate financial picture of a business’s operations by aligning revenue with expenses in the same period, which creates a better understanding of future cash flows. This allows businesses to make well-informed decisions about their operations and budgeting.