Plain definition
Accrual accounting records the economic effect of a transaction when goods or services are received or provided, not only when cash changes hands. It therefore assigns revenue and expenses to the period they relate to and recognises a related receivable, payable, prepayment, or other balance when the reporting requirements are met. Cash still matters, but cash movement answers a different question: whether the company has money available.
This distinction prevents a January payment from making December look more profitable than it was, or an early customer payment from making one month look more successful simply because cash arrived then. General-purpose IFRS financial statements use the accrual basis apart from cash-flow information.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A software company uses electricity during December and receives a invoice on 12 January. At the December close, the finance manager obtains the meter estimate and records of December utility expense and an accrued liability. When the invoice is paid in January, the payment settles the liability; it is not a second January utility expense. December now reflects the resources used to earn December revenue.
The estimate should be revised if the invoice or reliable usage data differs. An accrual is not permission to guess: it needs a reasonable basis and later follow-up.
Why it matters
Without the adjustment, December profit is overstated and January profit understated. Management could congratulate a December margin that excluded a real cost, then overreact to a January decline caused only by timing.
Practical consequence
Before each close, give budget owners a cut-off list: services received, goods delivered, work performed for customers, and payments made in advance. Finance should obtain contracts, delivery evidence, timesheets, or estimates; record supported adjustments; and reverse only entries designed to reverse. Compare the next invoice or receipt with the estimate and explain material differences.