Accrual is an accounting term that refers to the recognition of revenue or expenses before cash is exchanged. In accrual accounting, revenues are recognized when earned, and expenses are recognized when incurred, regardless of when the cash is received or paid. This is in contrast to cash accounting, in which revenues are recognized when cash is received, and expenses are recognized when cash is paid.
The accrual method of accounting is considered to be more accurate than cash accounting because it reflects the true economic performance of a business. It helps to match the revenues and expenses to the period in which they were incurred, rather than when cash was exchanged.
One example of accrual is when a company ships products to a customer on credit and the payment will be received in the future, but the revenue is recorded in the same period when the product is shipped. Another example is when a company purchases goods on credit and the payment will be made in the future, but the expense is recorded in the same period when the goods are received.
Accruals are also used to calculate some key financial ratios such as net income, gross margin, and operating margin. Accruals also affect the balance sheet, as it shows liability or assets that have not yet been settled in cash.
