What is Accrual Method of Accounting?

Accrual Method of Accounting (Definition)

The accrual method of accounting is where the income of a business is recorded in the year in which it is earned, while expenses are deducted or capitalized in the year in which they are incurred (which can often be different fiscal years). It gives business owners a more comprehensive view of the financial situation of their business. For example: for accounts payable, say CompanyA purchases $1,000 worth of materials from a supplier, on credit. Once the materials arrive, the accounting team adds them to the financials even though the bill hasn’t been paid yet. That $1,000 is listed as a liability. For accounts receivable, CompanyA sells $2,000 of product to another business. That $2,000 is entered in as accounts receivable (money owing) and it is recorded as an asset, though it hasn’t been paid yet.