Accrual accounting is a way of keeping financial records that focuses on when a company earns money or incurs expenses, regardless of actual cash transactions.
Accrual accounting tracks when a company earns money or spends it, not just when cash changes hands. It gives a fuller picture of a company’s financial health compared to the simpler cash accounting method.
How does it work?
In accrual accounting, transactions are recorded when goods or services are provided, not just when money is paid or received. This helps to show a more accurate view of a company’s finances, both short-term and long-term.
Unlike cash accounting, which records transactions only when cash changes hands, accrual accounting gives a more precise picture by recording when services are provided or debts are incurred.
Who Uses Accrual Accounting?
Most companies use accrual accounting, especially larger ones. It’s encouraged by financial standards and principles. Companies dealing with inventory or credit sales must also use accrual accounting, regardless of their size.
Accounting and Taxes
Companies need to be consistent in using either cash or accrual accounting for tax purposes. Small businesses may use cash accounting, while larger ones typically use accrual accounting.