Key MBA Models

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The accrual method in accounting

There are two basic ways of keeping the accounts for a business. The cash method accounts for revenues and expenses on the basis of cash flows – that is, when money is received or paid out. The accrual method accounts for revenue and expenses on the basis of when activities occur – for example, when a sale is agreed, regardless of when the cash associated with that sale is actually transferred. While the cash method is used a lot in small businesses and for personal finances, the accrual method is now the preferred method of accounting in medium and large companies.

When to use it

• To provide information about how well your business is doing.
• To clarify that cash flow and profitability are not the same ...