Michael Simonds
HSM/260
Accrual Method

The Accrual Method is a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for). When transactions are recorded on a cash basis, they affect a company's books only once a completed exchange of value has occurred; therefore, cash basis accounting is less accurate than accrual accounting in the short term. Smaller companies that haven't formally incorporated and most sole proprietors use cash-basis accounting because the system is easier for them to use on their own, meaning they don't have to hire a large accounting staff. If a company uses accrual accounting, it records revenue when the actual transaction is completed (such as the completion of work specified in a contract agreement between the company and its customer), not when it receives the cash. That is, the company records revenue when it earns it, even if the customer hasn't paid yet. Expenses are handled in the same way. The company records any expenses when they're incurred, even if it hasn't paid for the supplies yet. By using accrual accounting, the records of the business are kept more consistently. Every period shows exactly how much revenue a company earned and how much the expenses were for that same time frame. The accrual method offers an accurate picture of the business of a company. It shows more clearly how much it cost the company in expenses to earn the revenue for that period.
In the Accrual Method the cash account is related to the cash basis, while the revenue on an accrual system is not. Revenue