What is accrual accounting?

Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made. The method follows the matching principle, which says that revenues and expenses should be recognized in the same period. Accrual accounting uses the double-entry accounting method.

Should I use cash or accrual accounting?

Most businesses can choose between cash and accrual accounting methods. However, if an inventory is necessary to account for your income or your company’s income is over $25 million, the IRS will require you to use the accrual method.

What are the problems with accrual accounting?

The main problem with accrual accounting is the extra level of knowledge required to operate this system. A poorly-trained accountant might make the wrong accrual entries or forget to reverse them, resulting in financial statements that are less accurate than statements derived under the cash basis of accounting.

What is an example of an expense accrual?

The effect of this journal entry would be to increase the utility company's expenses on the income statement, and to increase its accounts payable on the balance sheet. Another example of an expense accrual involves employee bonuses that were earned in 2019, but will not be paid until 2020.