Documentation -> Accounting/Bookkeeping -> Prerequisite Knowledge -> Accrual Method/Basis

The Accrual Method or Basis prescribes that incomes are recorded when they are earned and expenses realized when they are incurred. Most larger businesses use this method of accounting and depending on circumstances may be desirable for small businesses as well. Some benefits and drawbacks follow.

Benefits

Entries are made when incomes (for instance) are invoiced and when they are actually received. This provides more data to be used in analysis and reports.

The Accrual Method is said to give a more accurate representation of expected incomes and expenses over time, in keeping with the matching priciple, which can allow companies to more wisely plan current financial operations. The primary example of this "increased accuracy" is it accounts for the modern way of doing business, for better or worse, by recording income from work on credit, and payments for work over time. The Cash Basis doesn't give the business any "credit" for this possible/probable income and doesn't necessarily keep the expenses in the same reporting period as the incomes, so is said to be "less accurate", because someone analysing the books (or software trying to generate financial statements) can't see this expected revenue, or possibly, the relation of the expenses to the incomes.

The recommended method of both GAAP and IFRS.

Lenders will likely expect or require that the Accrual Method be used. A certified audit by a CPA requires the accrual basis and The IRS requires some businesses to use accrual, as well. see pub 538 and this for more info on that.

Drawbacks/Limitations

Entries are made when incomes (for instance) are invoiced and when they are actually recieved. This is twice the labor of The Cash Basis.

As incomes are recorded when invoiced, instead of when paid, a business could be cash poor without realizing it, if they don't consult the Cash Flow Statement.

The Accrual Basis of Accounting sometimes requires one to estimate values, generally requires more accounts in the Chart of Accounts, and has more rules for when to do what. This requires more knowledge, patience and skill and could lead to inaccuracies in data and the financial analysis that depends on same, as well as subsequent labor to adjust or correct any innaccuracies.