Accrual accounting
Also called: accruals
The accounting method that records revenue when it is earned and costs when they are incurred, rather than when cash changes hands.
Under accrual accounting, a sale made on credit counts as revenue now, and a bill received but not yet paid counts as an expense now. Companies report their profits this way because it matches revenue with the costs of earning it.
The downside is that reported profit can differ a lot from cash collected in a given period.
Learn more in these lessons
- Profit compared with cash flowWhy can a profitable company run out of cash?
- Accrual accounting and cash accountingWhat is the difference between accrual and cash accounting?
- Quality of earningsHow can you tell whether a company's reported profit is reliable?
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