What is Accrual Accounting?
Accrual accounting is the method of recording revenues when they are earned and expenses when they are incurred, regardless of when cash moves. It is required under IFRS and US GAAP because it matches economic activity to the period it belongs to, giving a truer picture of performance than cash movements alone.
How accrual accounting works
Two principles drive it. Revenue recognition records income when control of a good or service transfers to the customer, not when the invoice is paid. The matching principle records the costs associated with that revenue in the same period, so margin is measured against the activity that produced it.
The mechanics produce familiar balance sheet items: accrued expenses for costs incurred but not yet invoiced, prepayments for cash paid in advance of consumption, accrued revenue for work delivered but not yet billed, and deferred revenue for cash received before delivery.
Accrual versus cash accounting
Cash accounting records transactions only when money moves. It is simpler, it mirrors bank activity directly, and it remains acceptable for small entities in many jurisdictions. Its weakness is that timing distorts the picture: a large December payment for a full year of insurance makes December look catastrophic and the following eleven months look better than they are.
Accrual accounting corrects this but introduces judgement, and judgement introduces risk. Deciding when revenue is earned, how much to accrue, and when to release a provision creates the estimation space where earnings management occurs, which is why period-end entries attract audit attention.
Accrual Accounting and Supervizor
Accrual entries are where judgement concentrates, and where errors cluster. Supervizor's finance transformation solution tests these entries across the full ledger. Finance teams use it to:
- Test every accrual and provision entry for documentation, approval and consistency with prior periods
- Detect cut-off errors where revenue or expense sits in the wrong period
- Flag unusual period-end adjustments, including reversals and manual entries posted outside normal hours