Accrual accounting is an accounting method that recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid. In other words, transactions are recorded when they occur, not when the cash is exchanged. This method contrasts with cash accounting, where transactions are only recorded when cash changes hands.

Key features of accrual accounting include:

1. **Recognition of Revenues:**
– Revenues are recognized when they are earned, which is typically when goods are delivered or services are performed. This is true even if the customer has not yet paid.

2. **Recognition of Expenses:**
– Expenses are recognized when they are incurred, meaning when goods or services are received, regardless of when the actual payment is made.

3. **Matching Principle:**
– Accrual accounting follows the matching principle, which aims to match expenses with the revenues they help to generate. This leads to a more accurate representation of a company’s financial performance during a specific period.

4. **Accruals and Deferrals:**
– To align with the accrual accounting principles, companies often make adjusting entries for accruals (recognition of revenues or expenses before the cash is received or paid) and deferrals (postponing the recognition of revenues or expenses until a future period).

5. **Financial Statements:**
– The financial statements produced under accrual accounting include the income statement, balance sheet, and statement of cash flows. These statements provide a more comprehensive view of a company’s financial position and performance compared to cash accounting.

6. **Consistency and Comparability:**
– Accrual accounting promotes consistency and comparability in financial reporting. Since transactions are recorded when they occur, financial statements are more reflective of the economic substance of business activities.

7. **Generally Accepted Accounting Principles (GAAP):**
– Accrual accounting is in line with Generally Accepted Accounting Principles (GAAP), which are a set of accounting standards and procedures used by companies to prepare their financial statements.

8. **Long-Term Perspective:**
– Accrual accounting provides a long-term perspective on a company’s financial health by considering all relevant transactions, including those that may have future consequences.

Accrual accounting is widely used by businesses, especially those that rely on providing goods and services on credit. It is the preferred accounting method for publicly traded companies and is required under GAAP for financial reporting purposes. The accrual basis provides a more accurate representation of a company’s financial performance and position, as it considers economic activities rather than just the timing of cash flows.