An accounting basis of recording transactions and events whereby recognition of revenues and expenses takes place when an economic exchange occurs, irrespective of the actual exchange of cash. This means that a firm’s performance can be measured by recognizing economic events regardless of the time of cash transactions. Accrual accounting better depicts a firm’s operations (in contrast with cash accounting) by matching expenses with revenues (the matching principle). This helps allocate revenues and expenses to get a better image of these operations. Accrual accounting may result in a situation where some revenues and expenses are recorded in periods other than those in which cash inflow/ outflow occurred.
Typically, public companies are required by regulators to apply accrual accounting in accordance with relevant accounting principles and standards.
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