Technical definition
Accounting that records economic events when value is earned or consumed, regardless of when cash moves.
How it works
Accrual accounting separates economic performance from payment timing. Revenue is recognized when the promised good or service is delivered; expenses are recognized when resources are consumed or obligations arise. Receivables, payables, prepayments and deferred revenue bridge the timing gap.
Everyday example
A consultant completes $1,200 of work in December and is paid in January. December records revenue and a receivable; January records the cash collection and removes the receivable.
Common pitfall
Cash received is not automatically revenue, and cash paid is not automatically an expense.