The accrual method of accounting is the method of accounting used by most large businesses in reporting their liabilities and expected income. The Internal Revenue Service (IRS) requires most businesses with income above $25 million to use this method of accounting because it more accurately reflects the current financial status of businesses with very complex and numerous transactions occurring. Conversely, some businesses also use the cash method of accounting which only reports transactions when they occurred. For example, if ABC Co. signed a sale contract to purchase XYZ Co.’s warehouse but did not pay yet, the accrual method would require ABC Co. to report the transaction because it is likely to occur, but the cash method would not require reporting the transaction until the payment occurred.
[Last updated in June of 2022 by the Wex Definitions Team]