Accrual accounting

In the accrual system of accounting, revenue is recorded after the completion of specified work and not when cash is received. This means that revenue is recorded when earned even though the customer has not yet paid. For instance, a contractor using the accrual system of accounting usually records the earned revenue after completing the job even though the final bill is not yet paid by the customer. Expenses are handled in a similar manner. The company records expenses when incurred even though the supplies have not been paid yet. For instance, when a carpenter purchases lumber, chances are that he will do this on account and not lay cash for this lumber till a month later when he obtains the bill.

Companies that are incorporated are required to use the generally accepted accounting principles (GAAP). Thus, revenue and expenses are matched so as to provide the company with a better picture on how much it is spending in operating every month and the profit it is making. On the other hand, expenses are usually accrued or recorded in the month it is incurred even though the cash is not paid till the following month. On the other hand, revenues are normally recorded in the month in which the products are shipped or project is completed even though the company has not yet received cash from customers.