Definition

Accrual accounting is an accounting method that records transactions as they occur, rather than when payment is received or made. This method is used to match revenues and expenses to the period in which they were incurred, regardless of when the money was actually exchanged.

 

Importance

Accrual accounting is important because it provides a more accurate picture of a company’s financial position. By recording transactions as they occur, it allows businesses to better track their income and expenses, and to make more informed decisions about their finances. It also helps to ensure that taxes are paid on time and that financial statements are accurate.

 

Example

For example, if a company sells a product on credit, the sale will be recorded in the accounting records when the product is shipped, not when the customer pays for it. This allows the company to track the income from the sale and to recognize the expense of the product when it is shipped.

 

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Key Takeaways

 

Conclusion

Accrual accounting is an important accounting method that provides businesses with a more accurate picture of their financial position. By recording transactions as they occur, it allows businesses to better track their income and expenses, and to make more informed decisions about their finances. It also helps to ensure that taxes are paid on time and that financial statements are accurate.