# What Is Accrual Accounting?

> Understand accrual accounting: when to recognize revenue and expenses, how it differs from cash basis, and why IFRS requires it. Clear examples with journal entries.

- Canonical page: https://accountery.app/learn/what-is-accrual-accounting
- Language: English (en)
- Category: fundamentals
- Estimated reading time: 9 minutes
- Published: 2026-04-09
- Updated: 2026-04-09

## 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):**

| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | 24,000 | |
| Cash | | 24,000 |

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

**Monthly adjusting entry (each month):**

| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | 2,000 | |
| Prepaid Insurance | | 2,000 |

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):**

| Account | Debit | Credit |
|---|---|---|
| Cash | 60,000 | |
| Unearned Revenue | | 60,000 |

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

**Monthly recognition:**

| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | 5,000 | |
| Subscription Revenue | | 5,000 |

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):**

| Account | Debit | Credit |
|---|---|---|
| Salary Expense | 40,000 | |
| Salaries Payable | | 40,000 |

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):**

| Account | Debit | Credit |
|---|---|---|
| Salaries Payable | 40,000 | |
| Cash | | 40,000 |

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.

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