Accrual Accounting

A reporting basis that recognizes economic activity when revenue is earned and expenses or obligations arise, rather than only when cash is received or paid.

Why It Matters

Accruals connect operating activity to reported performance and make multi-period comparison possible, but they also introduce estimates and timing judgments. Corporate-finance analysis uses the reconciliation from net income to operating cash flow to identify how receivables, inventory, payables, provisions, and non-cash charges affect financing needs.

Reading the Measure

A working relation and an interpretive limit for corporate-finance use.

Working relation

Net income = recognized revenue − recognized expenses

Interpretive caution

Profit is not cash. A profitable firm can face a liquidity shortage when customers have not paid, inventory absorbs cash, or obligations fall due before collections arrive.

Accounting reference: SEC: Beginners' Guide to Financial Statements