Accrual Basis vs. Cash Basis Accounting
Understanding the Basis of Recognition
Under accrual accounting, revenue and expenses are recognized when earned or incurred, regardless of when cash is received or paid. Cash basis accounting recognizes transactions only when cash changes hands. GAAP requires accrual accounting because it provides a more accurate representation of business performance.
Note
The accrual basis provides more relevant information for investors, lenders, and management.
Summary
Accrual accounting recognizes economic events rather than cash movements, producing more meaningful financial statements.