Accrual and Cash Accounting

Accrual accounting is a type of accounting which uses economic events regardless of when cash transactions occur.

Generally accepted accounting principles require accrual accounting methods because of its accuracy. This type of accounting provides a clear picture of a business' economic activity during a certain period - offering investors/management a better insight into an institution, in order to make a more educated guess about investments, as well as other business decisions.

Accrual basis accounting, which offers the most accurate overview of the financial state of an organization, refers to reporting income as it is earned, as well as when expenses are incurred, while organizations using cash basis accounting record when assets/funds are received and expenses are recorded when they are actually paid, regardless of invoice dates.