What is the accrual method?

The accrual method of accounting reports revenues on the income statement when they are earned even if the customer will pay 30 days later. At the time that the revenues are earned the company will credit a revenue account and will debit the asset account Accounts Receivable. (When the customer pays 30 days after the revenues were earned, the company will debit Cash and will credit Accounts Receivable.)

The accrual method of accounting also requires that expenses and losses be reported on the income statement when they occur even if payment will take place 30 days later. For example, if a company has a $15,000 repair done on December 15 and the vendor allows for payment on January 15, the company will report a repair expense and a liability of $15,000 as of December 15. (On January 15 the company will credit Cash and will debit the liability account.)

The accrual method of accounting, which is also known as the accrual basis of accounting, is required for large companies. (The cash method of accounting may be used by individuals and some small companies.) The accrual method and the associated adjusting entries will result in a more complete and accurate reporting of a company's assets, liabilities, equity, and earnings during each accounting period.

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