What is the key principle underlying accrual accounting?

The key principle underlying accrual accounting is to recognize revenues when they are earned and expenses when they are incurred, regardless of when cash is exchanged. This principle ensures that financial statements reflect the economic activities of a business during a specific period. By recognizing revenues when earned, businesses report income in the period when they have provided goods or services, which may occur before the receipt of cash. Similarly, expenses are recorded when they are incurred, ensuring that costs are matched with the revenues they help generate, thus providing a more accurate picture of a company’s financial performance.

This approach enhances the relevance and comparability of financial information, allowing users to understand the true profitability and financial position of the organization, irrespective of cash flow timing. The focus is on the timing of economic events rather than cash transactions, which is a distinguishing feature of accrual accounting compared to cash accounting.