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Accrual Accounting: Definition and Meaning
Definition
Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid.
Why It Matters
Accrual accounting can provide a more complete view of a company’s activity during a reporting period. It helps match revenue with the expenses incurred to produce it, which can make financial statements more useful for management, lenders, owners, and other users.
The right method for a business depends on its facts, reporting needs, and applicable tax or financial-reporting rules. Construction companies often need careful attention to accruals, project costs, billings, and revenue-recognition questions.
Example
A business performs services in December but receives payment in January. Under accrual accounting, the December revenue may be recorded in December when earned.
Related Terms
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