What Is Accrual Accounting?

The Core Idea

Accrual accounting records transactions when they economically occur — not when cash changes hands.

• Revenue is recorded when the company earns it (delivers the service or product)
• Expenses are recorded when the company incurs them (uses the resource)

This gives a more accurate picture of financial performance than tracking cash alone. That's why IFRS requires accrual accounting for virtually all businesses.

Accrual vs Cash Basis — Side by Side

Scenario: A company performs SAR 50,000 of consulting work in December. The client pays in January.

Cash Basis: - December: No revenue recorded (no cash received) - January: SAR 50,000 revenue recorded (cash received)

Accrual Basis: - December: SAR 50,000 revenue recorded (work was completed) - January: No new revenue — just a cash collection

The accrual method correctly shows that December was productive and January was just a collection. Cash basis makes December look like nothing happened.

Why IFRS Requires Accrual Accounting

Under IFRS, financial statements must reflect the economic reality of business activity, not just cash flow. Three key reasons:

1. Timing accuracy — Revenue and expenses appear in the period they actually relate to.

2. Better decision-making — Investors and managers see true profitability, not just cash flow timing.

3. The matching principle — Expenses are matched with the revenues they help generate, in the same period. This prevents misleading profit figures.

Worked Example: Prepaid Insurance

Scenario: On January 1, a company pays SAR 24,000 for a 12-month insurance policy.

Entry at payment (January 1):

This is not an expense yet. The company has an asset — 12 months of future insurance coverage.

Monthly adjusting entry (each month):

Each month, SAR 2,000 of coverage is "used up." The asset decreases, the expense increases. After 12 months, the prepaid balance reaches zero.

Worked Example: Unearned Revenue

Scenario: A SaaS company receives SAR 60,000 upfront for a 12-month subscription starting April 1.

Entry at cash receipt (April 1):

The company hasn't earned this yet. It's a liability — the company owes 12 months of service.

Monthly recognition:

Each month, SAR 5,000 of the obligation is fulfilled. The liability decreases, revenue increases.

Worked Example: Accrued Expense

Scenario: Employees earn SAR 40,000 in salaries during December. Payday is January 5.

Adjusting entry (December 31):

The expense belongs in December (when the work was done), even though the cash won't leave until January. Accrual accounting matches the expense to the period it relates to.

Payment entry (January 5):

The liability is cleared when cash is paid.

Common Accrual Accounting Mistakes

1. Recording revenue when cash arrives — The most common error. Revenue belongs when the service is delivered, not when the check arrives.

2. Forgetting adjusting entries — Prepaid expenses and unearned revenue must be adjusted every period. Skip this step and your financial statements will be wrong.

3. Confusing cash flow with profit — A company can be profitable but cash-poor (lots of receivables). Or cash-rich but unprofitable (lots of unearned revenue). Accrual accounting shows the truth.