Accrual basis

Definition

Accrual basis is an accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid. This provides a more accurate picture of a company's financial position than cash basis accounting.

5 Must Know Facts For Your Next Test

1. Accrual basis accounting recognizes revenue when it is earned and expenses when they are incurred.
2. This method adheres to the matching principle, ensuring that revenues and related expenses are reported in the same period.
3. Accrual basis is required by Generally Accepted Accounting Principles (GAAP) for publicly traded companies.
4. It can provide a more accurate representation of a company's financial health compared to cash basis accounting.
5. The Statement of Cash Flows adjusts net income from accrual to cash basis to show actual cash inflows and outflows.

Review Questions

• What is the primary difference between accrual basis accounting and cash basis accounting?
• How does accrual basis accounting adhere to the matching principle?
• Why might a company prefer using accrual basis over cash basis for financial reporting?

Related terms

Cash Basis: An accounting method where revenue and expenses are recorded only when cash is exchanged.

Matching Principle: An accounting principle that dictates that companies report expenses at the same time as the revenues they are related to.

Generally Accepted Accounting Principles (GAAP): A set of rules and standards used in financial reporting that ensures consistency, reliability, and comparability of financial statements.