How is accrual accounting defined?

Accrual accounting is defined as recognizing revenues and expenses when they are incurred, regardless of when cash is actually exchanged. This method aligns financial reporting with the actual economic events that change a company's financial position. For instance, revenue is recognized when a product is delivered or a service is performed, even if payment has not yet been received. Similarly, expenses are recorded when they are incurred, which provides a more accurate snapshot of a company's financial health at any given time.

This approach contrasts with cash basis accounting, which would recognize revenues and expenses only when cash is exchanged, leading to a potentially distorted view of a company's financial situation if there are significant delays in cash flow. Accrual accounting allows businesses to provide a more complete and realistic view of their financial performance and position, as it takes into consideration all economic events that affect a company, regardless of the timing of the cash flows.