What does “accrual accounting” emphasize?

Accrual accounting emphasizes recognizing revenues and expenses when they are incurred, regardless of when cash transactions occur. This approach allows individuals and organizations to match income earned and expenses incurred in the same period, providing a more accurate picture of financial performance and position.

Under accrual accounting, revenues are recorded when they are earned, and expenses are recognized when they are incurred, which is essential for understanding the true financial health of a business over a given time frame. For instance, even if a service is provided in one period but payment is received in another, the revenue should be recorded in the period the service was rendered. This principle contrasts with cash accounting, which only recognizes transactions when cash changes hands, potentially distorting the business's financial perspective.