What is accrual accounting?


Quick Answer

Accrual accounting occurs when a business counts transactions on the books regardless of when they are paid in full, according to Nolo. Transactions are counted when an order is made or goods are received when using the accrual method.

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Full Answer

Large businesses record income when a product or service is delivered. This occurs after an order has been placed, processed and completed. For instance, a cookie company will not record the sale until the batch is completed and delivered to the party that ordered the cookies. The same is true for a business that purchases a good or service, notes Nolo. The accounting for service work done on a building's air conditioner is not recorded until after the machinery is fixed completely.

The accrual accounting method offers businesses a more accurate portrait of a company's current status. The accrual method also recognizes when a person, company or group takes full possession of a good or service as opposed to when that good or service is paid completely, according to Investopedia. A large order for $300,000 may take months to complete, but a company may list that as accrued income because the job completion date is in the future. Likewise, a new refrigeration unit that costs $750,000 to install may not be ready for several weeks, so a business owner may not claim the refrigerator as an expense until after the unit functions fully.

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