accrual basis accounting

Definition

System of accounting based on 'accrual principal' under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred. Totals of revenues and expenses are shown in the financial statements (prepared at the end of an accounting period), whether or not cash was received or paid out in that period. Accruals basis accounting conforms to the provisions of GAAP in preparing financial statements for external users, and is employed by all firms except the very small ones (which use cash basis accounting). Also called accrual accounting. See also modified accrual basis accounting.