Definition

• According to Investopedia, accrual accounting is "an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur." As one of two methods used to collect accurate financial information (accrual and cash), the accrual method is the method required by the Generally Accepted Accounting Principals (GAAP), according to Venture Momentum. GAAP is set by the Financial Accounting Standards Board, a board of professionals who have set industry policy based on best practices and industry standards. Any accountants, agencies or businesses that operate under GAAP require the use of this method.
  
  

Method

• In the accrual method of accounting, revenues and expenses are recorded not when cash changes hands but rather when the transaction occurs. An example of accrual accounting might be a rent-to-own transaction. If an individual purchases a love seat in December, agreeing to make monthly payments for six months, the transaction would be recorded by the business for both cost and revenue during December instead of when the payments are incurred.
  
  

Advantages

• By using an accrual method, a company's revenues and expenses can be more easily paired together. This method of accounting better allows for the preparation of financial statements, which are expected by any potential future investors to be done in accordance with GAAP. This is helpful because when the transaction is recorded, both revenue and expenses match simultaneously as opposed to recording cost at the time of the transaction and reporting the revenue several months later. It gives a more true picture of the financial aspect of a company.
  
  

Disadvantages

• There are some drawbacks to the accrual method as well. Because transactions are not as straightforward, the accounting can be more difficult. Since the transaction is recorded at the time of sale, the method assumes the collection of revenue, which sometimes may be days, weeks, months or even years later. Accordingly, this method does allow for errors. Small businesses wishing to use the accrual method are more likely to require the hiring of a full or part-time accountant to ensure attention to detail is paid in the financial sector.
  
  

Cash Method

• Unlike the accrual-based accounting method, the cash method records transactions when the money is received or paid out instead of the date of the transaction. For instance, if a love seat is sold to a customer on a rent-to-own basis in December, but all six payments are made in the following year, the transactions would be recorded when the payments are received. This method is desirable for small to medium businesses, those who either do not carry large inventory or those who simply do not accept any credit-based transactions.