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The Accrual Method of Accounting

In order to comply with U.S. GAAP and IAS, however, companies must present their income statement on an accrual basis, reporting revenues when earned and expenses when incurred. The timing of when revenues are earned does not necessarily coincide with when cash is received. Likewise, the timing of when expenses are incurred does not always coincide with when the expenses are paid. Instead, the matching principle requires that revenues and their associated expenses are recognized at the same time.

When the recognition of revenue or expense differs from the cash flow timing, it results in an accrual. Common accruals include:

  • Accounts receivable: results when revenue has been recognized (customer has received the goods or services) but cash has not yet been received
  • Accounts payable: results when the company has received goods or services for which it has not yet paid
  • Inventory: results when the company has paid for and received goods that have not yet been resold
  • For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis

    See also:
  • Cash Flow Statement - The Indirect Method
  • The Cash Method of Accounting
  • Cash Flow from Operating Activities
  • Cumulative Effect of Accounting Changes
  • Inventory Accounting: Differences Between U.S. GAAP and International Standards
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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