What does accrual accounting record?

Accrual accounting is based on the principle of recognizing revenues and expenses when they are earned or incurred, rather than when cash is exchanged. This means that income is recorded at the time a service is performed or a product is delivered, regardless of when the payment is actually received. Similarly, expenses are recognized when a company incurs a liability or when it uses a resource, even if it has not yet paid for that resource.

By adhering to this method, accrual accounting provides a more accurate picture of a company’s financial performance during a particular accounting period, aligning revenue recognition with the actual activities that generated that revenue. It ensures that financial statements reflect all relevant financial activities, which helps in making informed business decisions, as it considers all earned income and incurred expenses within the period they relate to.

This approach contrasts sharply with cash accounting, which records transactions only when cash changes hands.