Accrual Basis of Accounting

Accrual basis accounting records financial activity when it occurs, not when cash is exchanged.
It emphasizes the timing of economic events over the actual movement of money.
Revenue is recorded when goods are delivered or services are performed, even if payment is received later.
Likewise, expenses are recorded when they are incurred, not paid.
For example, consider a marketing agency that completes a campaign in October. The client agrees to pay in November.
The agency also receives an invoice for design software used during the campaign, payable in December.
Under the accrual basis of accounting, the revenue from the client and the expense for the software are both recognized in October, when the service was delivered and the software was used.
This method provides a more accurate view of financial performance during a given period.
The accrual basis of accounting uses adjusting entries at the end of the period to capture any earned revenues or incurred expenses that have not yet been recorded.
These adjustments ensure the records are complete and comply with generally accepted accounting principles, or GAAP, which require accrual accounting for most businesses.