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Accrual Accounting

What is accrual accounting?

Accrual accounting is an accounting method that allows a company to recognize revenue when it delivers goods or services to customers and recognize expenses when they are incurred.

This means that the company's income and expenses are recorded in its journal even if the cash has not been received or paid yet. Accrual accounting is often contrasted with cash accounting, which records revenue when the cash is actually received and expenses when the cash is actually paid.


Find out more about accrual accounting and how it differs from cash accounting, the other common accounting method.


How does accrual accounting?

Accrual accounting records accounting transactions based on when a good or service is delivered rather than when cash is exchanged. Accrual accounting can combine the current and future cash flows to show a more accurate picture of the company’s current and long-term financial situation. 

Accrual accounting follows the matching principle, i.e., revenue and expenses should be recorded in the same period they occur. 

Accrual accounting is recommended by International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Therefore, most companies use accrual accounting except for very small businesses and individuals.


Benefits of Accrual Accounting

The accrual method gives a better view of the company's current situation, but it also costs more to use because it is more complex. This method developed from needing more accurate financial information as business transactions became more complicated. Transactions involving credit sales or long-term projects that generate revenue over time affect the company's financial condition when they happen. It makes sense to record these events in the financial statements for the same period they occur.

With accrual accounting, firms get immediate feedback on their expected cash inflows and outflows, which helps them manage their current resources and plan for the future.