What is Accrual Accounting? Meaning, Principles, and Examples
Introduction
Accrual Accounting is an accounting method where revenues and expenses are recorded when they are earned or incurred, rather than when cash is received or paid. This method provides a more accurate picture of a company's financial health.
Meaning of Accrual Accounting
In accrual accounting, income is recorded when a sale is made, even if the payment is received later. Similarly, expenses are recorded when incurred, even if payment is made at a future date.
Real-Life Example
Imagine a freelance graphic designer who completes a project worth ₹50,000 in January but receives payment in March.
- Accrual Accounting: The ₹50,000 income is recorded in January (when the service was provided).
- Cash Accounting: The income would be recorded in March (when the payment was received).
Thus, accrual accounting provides a clearer financial picture by matching revenue with expenses in the same period.
Key Principles of Accrual Accounting
- Revenue Recognition Principle – Revenue is recorded when earned, not when payment is received.
- Matching Principle – Expenses are recorded in the same period as the revenue they help generate.
- Accrued Revenue & Expenses – Recognizing income and expenses even if cash hasn’t been exchanged yet.
Accrual vs. Cash Accounting
| Feature | **Accrual Accounting** | **Cash Accounting** |
|---|---|---|
| Revenue Recognition | When earned (invoice issued) | When cash is received |
| Expense Recognition | When incurred (bills issued) | When cash is paid |
| Accuracy | More accurate for long-term financial health | Simpler but less accurate |
| Common Usage | Used by large businesses, required for financial reporting | Used by small businesses and individuals |
Benefits of Accrual Accounting
✅ Gives a complete financial picture – Helps businesses track actual profitability.
✅ Matches revenue with expenses – Provides a realistic view of earnings.
✅ Essential for scaling businesses – Required for companies following international accounting standards.
Conclusion
Accrual Accounting ensures that businesses report income and expenses accurately, even if payments occur later. It provides a clear financial overview and helps businesses make informed decisions.