What is the accrual method of accounting?

The accrual method of accounting is characterized by recognizing revenues and expenses at the time they are incurred, regardless of whether cash has been exchanged. This means that income is recorded when earned and expenses are documented when they are incurred, which provides a more accurate representation of a company's financial position and performance during a specific accounting period.

This method contrasts sharply with cash accounting, where transactions are recorded only when cash is received or paid. The accrual basis is essential for businesses that need a clear view of their financial activities since it aligns income earned with expenses incurred, offering insights into profitability that may not be visible through cash accounting practices. This alignment is crucial for making informed financial decisions and preparing accurate financial statements, as it reflects the true financial health of an organization based on economic activity rather than cash movement.