Accrual accounting is an accounting method that reflects a business's real financial picture by recording revenues and expenses when they occur, not just when cash changes hands. So, if a company provides a service in March but gets paid in April, the revenue is still recorded in March.
Accrual accounting is standard for both GAAP and IFRS, especially for larger firms or firms that earn over $25 million per year. It follows the matching principle, which means expenses and their related revenues are reported in the same period.
A big advantage of accrual accounting is that it provides a more complete picture of a company's financial health by recognizing all revenues earned and expenses incurred. Such an approach is especially valuable for businesses offering credit terms or those managing long-term projects, e.g., businesses with complex transactions.Â
Although accrual accounting is often a requirement for larger companies, smaller businesses can also benefit from it. For startups and businesses on their way to growing, accrual accounting paints a clearer financial picture for investors by aligning revenue and expense recognition with business activities, unlike cash accounting, which only accounts for cash transactions.
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