Accrual accounting is the recording of revenue when earned and expenses when incurred. This accounting is recorded irrespective of the dates on which any associated cash flows occur. The primary impact of accrual accounting is on the income statement, since the reported net profit or loss of a business can be substantially altered by the recordation of accrual basis transactions.
Accrual basis accounting conforms to the generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) frameworks. Accrual accounting is required by these two major accounting frameworks, because it results in the most accurate representation of the financial results and financial position of a business.
Small businesses may use the less-complex cash basis of accounting. The cash basis is not considered as accurate as accrual accounting, since the recognition of transactions under the cash basis may be accelerated or delayed in accordance with when cash is received or paid.
Accrual accounting is required if the owners of a business want its financial statements to be audited. Auditors will not provide an opinion if the books are not compiled using the accrual basis of accounting.