What does Accrual Basis mean?
Accrual basis is an accounting method where revenue and expenses are recorded when they are incurred, regardless of when the cash is exchanged. This means that revenue is recognized when it is earned, and expenses are recognized when they are incurred, regardless of when payment is received or made.
For example, if a business provides services in December, but the customer does not pay until January, the revenue would still be recognized in December under accrual accounting. Similarly, if a business receives an invoice in December, but does not pay it until January, the expense would still be recognized in December under accrual accounting.
Accrual accounting provides a more accurate view of a company's financial performance over a period of time, as it reflects the economic activity that occurred during that period, regardless of when payment was made. This allows for a more comprehensive analysis of a company's financial health and performance.
Accrual accounting is the preferred method for larger businesses or those that need to provide financial statements that conform to accounting standards. However, it can be more complex and time-consuming than cash accounting, and requires a greater understanding of accounting principles and practices