Accrual-basis accounting

Definition

Accrual-basis accounting records revenues and expenses when they are incurred, regardless of when cash transactions occur. This method provides a more accurate picture of a company's financial position by including all earned and incurred amounts.

5 Must Know Facts For Your Next Test

1. Revenues are recorded when earned, not necessarily when cash is received.
2. Expenses are recognized when incurred, even if the payment is made later.
3. Accrual-basis accounting is required by Generally Accepted Accounting Principles (GAAP) for most companies.
4. It provides a more accurate representation of a company's financial health compared to cash-basis accounting.
5. Common adjustments in accrual accounting include accounts receivable, accounts payable, and prepaid expenses.

Review Questions

• What is the main difference between accrual-basis accounting and cash-basis accounting?
• Why is accrual-basis accounting considered to provide a more accurate financial picture?
• What types of transactions require adjustments in accrual-basis accounting?

Related terms

cashBasisAccounting: Records revenues and expenses only when cash is exchanged.

accountsReceivable: Money owed to a company for goods or services that have been delivered but not yet paid for.

accountsPayable: Amounts a company owes to suppliers for items or services purchased on credit.