Finance Dictionary
Accrual
Definition
An accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.
Deep Dive
Accrual accounting is a fundamental accounting method where revenues and expenses are recognized and recorded when they are earned or incurred, regardless of when cash actually changes hands. This approach provides a more accurate picture of a company's financial performance over a specific period by matching revenues with the expenses that generated them, adhering to the matching principle. It stands in contrast to cash basis accounting, which only records transactions when cash is received or paid.
Examples & Use Cases
- 1A consulting firm completes a project for a client in December but issues the invoice, and receives payment, in January. Under accrual accounting, the revenue is recognized in December.
- 2A company uses electricity throughout March but receives and pays the utility bill in April. The electricity expense is recorded in March, the period it was consumed, even though the cash outflow occurs later.
Related Terms
Cash Basis AccountingAccounts ReceivableAccounts PayableMatching Principle