What does the term Accrual refer to in accounting practices?

The term "Accrual" in accounting practices refers to recognizing revenues and expenses when they occur, irrespective of when cash is actually received or paid. This principle is central to accrual accounting, which is designed to provide a more accurate financial picture of a business by matching income earned with expenses incurred in the same period.

For instance, if a company performs a service in December but won't receive payment until January, the revenue from that service is still recognized in December, aligning with the period in which the transaction occurred. Similarly, if a company incurs expenses in December but pays for them in January, those expenses are recognized in December as well. This method contrasts with cash basis accounting, where transactions are recorded only when cash changes hands, leading to potential discrepancies in financial reporting.

Understanding the accrual basis is essential for accurately reporting financial performance, ensuring that the financial statements reflect economic activity during the period rather than just cash flow.