Accrual Accounting: Definition, Modified Accrual & Cash Accounting Explained
Learn what accrual accounting is, how it differs from cash accounting, and what modified accrual accounting means. Understand how accruals work to provide an accurate picture of a company’s financial position.
What Is Accrual Accounting?
Accrual basis accounting is an accounting method where revenue and expenses are recorded when they are earned or incurred, rather than when cash is exchanged.
This approach provides a more accurate picture of a company’s financial position by recognizing financial events as they occur.
In accrual accounting, accounts receivable and accounts payable are common examples, ensuring that income and expenses are matched to the period in which they actually happen.
How Do Accruals Work in Accounting
Accruals in accounting involve recording revenues that have been earned but not yet received and expenses that have been incurred but not yet paid.
For example, a company may deliver a service in December but receive payment in January; under accrual accounting, the revenue is recorded in December.
Similarly, expenses like utility bills are recognized in the period they are incurred, even if the payment happens later.
Accruals ensure that financial statements accurately reflect the company’s performance and obligations in the correct accounting period.
What Is Modified Accrual Accounting?
Modified accrual accounting is a hybrid method that combines elements of accrual and cash accounting. Revenues are recorded when they are measurable and available, while expenditures are generally recognized when the related liability is incurred.
This method is commonly used by government entities and non-profits to balance financial reporting accuracy with cash flow considerations.
Accrual Accounting vs Cash Accounting
The key difference between accrual basis accounting vs cash basis accounting lies in timing.
Cash accounting records revenue and expenses only when cash changes hands, while accrual accounting recognizes transactions when they occur, regardless of cash flow.
Accrual accounting gives a more complete and realistic view of financial health, making it preferred for larger businesses and companies that need to comply with standard accounting principles.
