What are accruals in the context of accounting?

Accruals in accounting refer to the practice of recognizing revenue and expenses in the financial statements when they are earned or incurred, rather than when cash is exchanged. This approach aligns with the accrual basis of accounting, which states that financial statements should reflect all relevant financial information about a company's operations during a period.

By recognizing revenue before cash is received and expenses before they are paid, accrual accounting provides a more accurate picture of a company’s financial position and performance. For example, if a company delivers a service in one accounting period but receives payment in the next, the revenue from that service is recorded in the period the service was provided, not when the payment is collected. Similarly, expenses incurred for services or goods that will be paid for later are recorded in the period the service or goods are acquired.

This method is particularly important for businesses that operate on credit or have long-term projects, as it allows them to match revenues and expenses within the same timeframe, ensuring reports reflect true profitability and financial health.

Other options do not accurately describe accruals: planning for future expenses does not pertain to the recognition principle, while cash transactions relate to cash accounting rather than accrual accounting. Adjustments to previous financial statements would involve corrections but aren't defined