Accrual Accounting
 |
Definition of 'Accrual Accounting'An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition. |
 |
Investopedia explains 'Accrual Accounting'Accrual accounting is considered to be the standard accounting practice for most companies, with the exception of very small operations. This method provides a more accurate picture of the company's current condition, but its relative complexity makes it more expensive to implement. This is the opposite of cash accounting, which recognizes transactions only when there is an exchange of cash.The need for this method arose out of the increasing complexity of business transactions and a desire for more accurate financial information. Selling on credit and projects that provide revenue streams over a long period of time affect the company's financial condition at the point of the transaction. Therefore, it makes sense that such events should also be reflected on the financial statements during the same reporting period that these transactions occur. For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year. Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue. For more on Accrual Accounting and other accounting basics, check out our Accounting Basics Tutorial. |
 |
Related Video for 'Accrual Accounting'
|
Related Definitions
Articles Of Interest
-
Measuring Company Efficiency
Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period. -
How To Decipher Accrual Accounting
Accrual accounting is an important method of measuring the performance and position of a company. Learn more on how its used. -
Get A Tax Credit For Your Foreign Investments
The foreign tax credit provides a break on investment income made and taxed in a foreign country. -
Operating Cash Flow: Better Than Net Income?
Differences between accrual accounting and cash flows show why net income is easier to manipulate. -
How does accrual accounting differ from cash basis accounting?
The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. ... -
Cash Flow On Steroids: Why Companies Cheat
Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it. -
Navigating Government And Nonprofit Financial Statements
Learn how to trace where your tax dollars and charitable donations are going. -
What is the difference between amortization and depreciation?
Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally expensed based on the time period over which the asset was ... -
Given a good bookkeeping system, would financial accounting be necessary?
Bookkeeping and financial accounting may seem like they are new creations, but variations have been around for millennia. The first record keeping systems, according to some, originated in about ... -
Advanced Financial Statement Analysis
Learn what it means to do your homework on a company's performance and reporting practices before investing.
Free Annual Reports