Accrual accounting is an accounting method that records revenue and expenses when they occur, regardless of when cash transactions take place.
For instance, if a customer buys a product on credit, accrual accounting acknowledges the cost in revenue at the time of the sale, not when the payment is received.
This method contrasts with cash basis accounting, where revenue is recorded only when payment is made. Accrual accounting provides a more accurate picture of a company’s financial health, making it the preferred choice for larger businesses and publicly traded companies.
Smaller businesses and individuals may opt for cash basis accounting for its simplicity and ease of tracking transactions.