Accrual Accounting
Definition
Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. It is the basis of US GAAP and IFRS, built on the matching principle: expenses are matched to the revenue they help generate.
This creates timing differences between profit and cash that populate the balance sheet: accounts receivable (revenue earned, cash not received), deferred revenue (cash received, revenue not yet earned), accounts payable and accrued expenses (expense incurred, cash not paid), and prepaid expenses (cash paid, expense not yet incurred).
The cash flow statement exists to bridge accrual net income back to cash — which is why the indirect method starts with net income and reverses out accrual effects.
Why interviewers ask
Accrual concepts underpin nearly every statement-walk question: "customer pays $100 upfront for a year of service — walk through the statements" tests deferred revenue; "you sell on credit" tests receivables. The trap is booking revenue when cash arrives (cash-basis thinking) rather than when it is earned.
Related terms
Interviews don't test definitions — they test recall under pressure.
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