Accrual accounting and cash basis accounting are two methods for recording income and expenses, differing mainly in the timing of when those items are recorded. With the cash method, revenues are recorded when they are received and expenses are recorded when they are paid. The accrual method, on the other hand, records revenues when they are earned and expenses when they are consumed.
Small businesses often use cash basis accounting, but the timing issues can sometimes result in wider swings in reported results. As such, the accrual method may provide a more accurate picture of the stability of inflows and outflows of the business. Also, company financials can only be properly audited if the method used is accrual.