What is accrual accounting?

Accrual accounting is fundamentally about recording economic events when they occur, regardless of when cash transactions take place. This approach allows businesses to recognize revenue when it is earned—that is, when services are provided or goods are delivered—even if the payment has not yet been received. This principle reflects the matching concept in accounting, whereby income is matched with the expenses incurred during the same period to produce that income, providing a more accurate financial picture of a company's performance.

In contrast, other approaches, such as cash basis accounting, would only recognize revenue when the cash is actually received, which could lead to a distorted view of financial health over time. By focusing on the timing of the actual earning of the revenue, accrual accounting offers a more comprehensive view of income and expenses related to the operational activities of a business, crucial for users of financial statements looking to assess ongoing performance and trends.