Accrual-basis accounting
Definition
Accrual-basis accounting records revenues and expenses when they are incurred, regardless of when cash transactions occur. This method provides a more accurate picture of a company's financial position by including all earned and incurred amounts.
5 Must Know Facts For Your Next Test
- Revenues are recorded when earned, not necessarily when cash is received.
- Expenses are recognized when incurred, even if the payment is made later.
- Accrual-basis accounting is required by Generally Accepted Accounting Principles (GAAP) for most companies.
- It provides a more accurate representation of a company's financial health compared to cash-basis accounting.
- Common adjustments in accrual accounting include accounts receivable, accounts payable, and prepaid expenses.
Review Questions
- What is the main difference between accrual-basis accounting and cash-basis accounting?
- Why is accrual-basis accounting considered to provide a more accurate financial picture?
- What types of transactions require adjustments in accrual-basis accounting?
"Accrual-basis accounting" appears in:
Subjects (1)
Study guides (1)
Related terms
cashBasisAccounting: Records revenues and expenses only when cash is exchanged.
accountsReceivable: Money owed to a company for goods or services that have been delivered but not yet paid for.
accountsPayable: Amounts a company owes to suppliers for items or services purchased on credit.
