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Accrual basis refers to an accounting method where expense items and income are recognized as incurred or earned, even if they have not yet been received or paid. It is also referred to as accrual method. It is the opposite of cash basis.
Accrual basis accounting records earnings and expenses as they occur or are incurred, without regard to the actual date of collection or payment. Under the accrual method, companies have some power to decide when income and expenses are recognized, but there are rules governing the recognition. In addition, companies are required to make prudent estimates against revenues that are recorded but may not be received, called a bad debt expense.
Accrual accounting ensures that the income tax paid in a given tax year properly corresponds to actual profits earned in that year. The major disadvantage of the accrual method is that most businesses will report higher profits and pay more income taxes. Also, the ability to accrue unpaid expenses has been reduced by tax laws that make many deferred costs harder to deduct e.g., vacation pay, bonuses, property taxes, and many other expenses.