Legal Definitions - accrual basis

The accrual basis is an accounting method that records entries of debits and credits when the liability arises, rather than when the income or expense is received or disbursed. This means that income and expenses are recognized when they are earned or incurred, regardless of when the cash is received or paid out.

• Accrual Accounting Method: A company provides services to a client in December but does not receive payment until January. Under the accrual basis, the company would recognize the revenue in December when the services were provided, even though the payment was not received until the following year.
• Cost Accounting Method: A company purchases a piece of equipment for $10,000. Under the cost accounting method, the equipment would be recorded on the company's books at its cost of $10,000.
• Percentage-of-Completion Method: A construction company enters into a contract to build a new office building for $1 million. Under the percentage-of-completion method, the company would recognize revenue gradually as the building is constructed, rather than recognizing all of the revenue when the project is completed.

These examples illustrate how the accrual basis records income and expenses when they are earned or incurred, rather than when the cash is received or paid out. This method provides a more accurate picture of a company's financial position and performance, as it reflects the company's economic activity rather than just its cash flow.