What is Accrual Basis of accounting?

Definition: An accounting method that recognizes economic events regardless of when cash transactions occur.

For example: an expense incurred in a period for which no invoice had been received at the end of that period, is considered an accrued expense, and is still recognized.

Accruals are any amounts that have not been accounted for, yet still owing at the period or year end. If the amount is unknown, estimates are necessary and then added to the expenses in order to show a more accurate representation in the income statement.

Accruals come in two forms

  1. When the benefits have been taken by the company, but no payments were paid as of yet.
  2.  Services which have been performed but payment was not received.

Practically all companies use the accrual basis of accounting. This is done in order to match expenses with the revenues they helped to earn in the appropriate period