What is Accrual Accounting?

Accrual accounting is the counterpart to cash accounting, and the accrual method puts expenses and revenues on the books as soon as they are contractually agreed-upon.

Accrual accounting is required by GAAP conventions for all publicly traded companies who have over $5 million in annual revenues. This method is the counterpart to cash accounting, which may be more useful to smaller businesses.

In accrual accounting, the expenses and revenues which are agreed upon are written onto the business’s ledger at the current time, regardless of when payment will actually settle on the transaction. When a sale is made or service is performed, the revenue from the activity is documented, even if no cash is received in the current period.

Balances reported at the end of the period include values that may not be reflected in actual cash received or paid out. In cash accounting, only real cash flows are documented at the time that cash changes hands.