Accrual refers to the accounting method of recognizing revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid. This means that revenues are recorded when they are earned, even if the payment for those revenues is not received until a later time, and expenses are recorded when they are incurred, even if the payment for those expenses is not made until a later time.
Accruals for businesses are important because:
- It provides a more accurate picture of a company’s financial position and performance by matching revenues and expenses to the period in which they were earned or incurred.
- It provides a better basis for financial analysis and comparison between different companies or periods, as it presents a more accurate reflection of a company’s financial activities and results.
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It follows the accounting principle, which aims to match revenues with expenses incurred to generate net revenue within the same accounting period.
- It is needed when filing for taxes as many businesses are required to provide their accruals statement
