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Simple English definitions for legal terms
accrual method of accounting
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A quick definition of accrual method of accounting:
The accrual method of accounting is a way that big businesses keep track of their money. It means they report all the money they expect to get and all the money they owe, even if they haven't paid or received it yet. This helps them have a better idea of how much money they have at any given time. The government makes most big businesses use this method because it's more accurate. Some businesses use a different method called the cash method, which only reports money when it's actually paid or received.
A more thorough explanation:
The accrual method of accounting is a way that most large businesses use to report their liabilities and expected income. This method requires businesses to report all economic transactions, whether liabilities or income, when all the events have occurred which fix the right to receive such income. This method is used by businesses with very complex and numerous transactions occurring.
For example, if a company signs a sale contract to purchase a warehouse but has not paid yet, the accrual method would require the company to report the transaction because it is likely to occur. However, the cash method would not require reporting the transaction until the payment occurred.
The Internal Revenue Service (IRS) requires most businesses with income above $25 million to use this method of accounting because it more accurately reflects the current financial status of businesses. Some businesses also use the cash method of accounting which only reports transactions when they occurred.