Accrual based accounting is a practice that links a company’s revenue/liability at the point of sale/invoicing irrespective of whether it’s paid by cash or credit. It means that regardless of when the company receives revenue for a sale or has to pay an invoice, the cash inflow/outflow will be recognised at the point of transaction, reflecting more accurately the company’s financial state.
For example…
Let’s say that you buy a lovely lounge set from a furniture retailer. If you pay by credit, the retailer’s accounts will only reflect the sale in the next month or year whereas if you pay by cash, the sale will be recognised once the entire cash amount is paid. On the other hand, using an accrual based accounting practice, the sale will immediately be recognised as revenue.
