Accrual is a concept in accounting that refers to the recording of revenue and expenses when they are incurred regardless of when the cash transactions occur. This is a fundamental principle of accrual accounting which is in contrast with cash accounting. The accrual concept ensures that the financial statement reflects all the revenues earned and expenses incurred in a given accounting period.
Accrual can be thought of as a way of keeping track of money that has been earned or spent but hasn’t been received or paid in cash. For example, if you performed a service in December but didn’t get paid for it until the end of January, the income would be recorded in December.
Accrual accounting is widely used in business transaction reporting for financial reporting and analysis. It provides a more accurate picture of the financial position of the company as it includes all revenues and expenses within the period in which they incurred. This allows businesses, investors, and analysts to make more informed decisions.
For example, a consulting firm completes a project in November but does not receive the payment till February. In the case of accrual accounting, the revenue is recorded in November. Similarly, a utility bill for the service used in December is paid in January. The expense will be recorded in December to align with when the service was used.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy