The accrual basis is an accounting method that records financial transactions as they happen rather than when cash trades hands. In simpler terms, income is recorded when earned, and expenses are logged when incurred, regardless of when the actual cash payment occurs.
Businesses commonly use the accrual basis method because it offers a more accurate snapshot of their financial health compared to the cash basis method, which records income and expenses only when money actually changes hands. The accrual basis enables companies to recognize revenue at the moment they fulfill their obligations, even if payment gets delayed.
For instance, if you perform services for a client in December but don't receive payment until January, your business would recognize the income in December when the service was provided. Similarly, an expense would be logged as soon as it's incurred, rather than when the bill is paid.
While the accrual basis gives a clear view of profitability and financial positions, it may require careful monitoring since income might be recorded before actual payments come in. This approach is widely recommended and, in many jurisdictions, legally required for larger companies, as it offers insightful information useful for planning, budgeting, and making long-term business decisions.
