An accounting method that is based on the recognition of income as earned and expenses as incurred, regardless of the period in which cash is exchanged. For example, a service firm using accrual accounting will record sales as revenue when services are rendered even though payment is deferred for a few months. In such credit sales, accounting revenues fall short of actual cash inflows, since no cash has been received for services sold.

Calculating earnings using recognized revenues before actually receiving those revenues can potentially lead to the overestimation of financial results and may inflict financial troubles on a firm, in terms of illiquidity and inability to meet obligations. For example, a company that sells large amounts of commodities on credit may produce spectacular “accounting” earnings in the current accounting period, but if customers who receive the goods default or fail to pay, actual earnings are likely to suffer, bringing the company financially to its knees.

Accrual accounting is also known as accrual basis accounting.