Accrual accounting is an accounting method where the revenue and expenses are recorded when they are earned or incurred regardless of when the cash transaction occurs. This method is different from cash accounting where the transactions are recorded only when cash is exchanged. The accrual method of accounting provides a more comprehensive and accurate picture of the financial health as well as the performance of an entity.
Accrual accounting is like a track record of what is earned and what has to be paid not just what is received and what is paid. For example, if a job is done in June but we are paid for it in July, we will record the same in June in case of accrual accounting. In the same manner, if the bill was received in June but we paid it in July, then the expense will be noted in June. The important consideration here is matching the revenue and expenses when they happen and not just when the money changes hands.
Accrual accounting is the standard practice followed in financial reporting, analysis, and decision-making. It is used by companies, investors, and financial analysts to understand the true health of a business and decipher the actual performance of the business. This method is essential for compliance with the financial reporting standards.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy