In accounting, accrual accounting records revenue when it is earned rather than when cash is received.
Under this method, transactions are recognized when the economic activity occurs. A company that delivers goods in December but receives payment in January records the sale in December. Likewise, an expense can be recorded when a business receives a service, even if it pays the supplier later.
This approach is based on the matching principle: expenses should generally be reported in the same period as the revenue they help generate. It therefore gives readers a fuller picture of performance than a simple list of bank receipts and payments. Most larger businesses and companies producing financial statements under major accounting frameworks use accrual-based reporting.
Cash accounting is the main contrasting method. It recognizes transactions when money changes hands, which can be simpler for small businesses. Accrual accounting can create receivables and payables, so reported profit may differ from cash available in the bank.