Accounting method that recognizes revenue when earned and expenses when incurred rather than when cash changes hands.
Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. It is the period-based logic behind most formal financial reporting.
Cash timing alone can make a period look better or worse than the underlying performance really was. Accrual accounting exists so statements reflect economic activity in the period where it belongs instead of the period where cash happened to move.
Under accrual accounting, a business may recognize revenue before collection and recognize expenses before payment. That creates related balance-sheet accounts such as receivables, payables, accruals, prepaids, and deferred balances. Adjusting entries are often what bring those amounts into the correct period before statements are issued.
The result is usually a more decision-useful set of financial statements than simple cash-basis reporting.
A company completes a $10,000 service in December and collects cash in January:
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 10,000 | |
| Service Revenue | 10,000 |
The revenue belongs to December because that is when the service was earned, even though the cash arrives later.
Accrual accounting does not mean cash is irrelevant. It means cash timing and recognition timing are different questions, and financial reporting focuses on when activity is earned or incurred. It is also broader than a single accrual, which is one specific period-end recognition item or entry.