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Glossary/Accounting and GAAP

Accrual basis accounting

Accrual basis accounting records revenue when earned and expenses when incurred, regardless of when cash moves, and is the foundation of US GAAP financial statements for operating entities.

CORAA TeamUpdated November 5, 2026

Definition

Accrual basis accounting recognizes the effects of transactions in the period they occur, not when cash is received or paid. Revenue is recognized under ASC 606 when control of goods or services transfers, and expenses are matched to the period in which the related benefit is consumed. Accruals, prepayments, deferrals, and estimates are the mechanics that bridge cash and earnings.

Why it matters in an audit or review

US GAAP requires accrual accounting, so most audit risk sits in the judgment-heavy adjustments: cutoff, unrecorded liabilities, revenue deferral, and estimates. A client that keeps books on cash during the year must convert to accrual before year-end for GAAP statements, and the conversion entries are a high-risk area for omission and error.

Example

A company ships goods on December 28 (illustrative: $50,000) and collects cash on January 10. On accrual, revenue and a receivable belong in the year ended December 31.

Dr Accounts receivable 50,000 Cr Revenue 50,000

A cash-basis ledger would show nothing until January.

Common mistakes

  • Recording year-end accruals only for invoices received, missing services received but not yet billed.
  • Leaving prepaid costs expensed when paid.

FAQ

Does GAAP allow cash basis?

Not as GAAP. Cash or modified-cash statements can be issued under a special purpose framework with a disclosed basis and a matching report title.

Sources

  • FASB, Concepts Statement No. 8, Chapter 1, The Objective of General Purpose Financial Reporting (accrual accounting)
  • FASB ASC 606-10-25, Revenue from Contracts with Customers, Recognition
  • AICPA, AU-C Section 800, Special Considerations, Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks

Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error

Standards

ASC 606

Related terms

  • Cash basis accounting
    Cash basis accounting records revenue when cash is received and expenses when cash is paid; it is not US GAAP, but can serve as a special purpose framework with proper disclosure.
  • Accrued expenses
    Accrued expenses are costs incurred in a period but not yet paid or invoiced, such as wages, interest, utilities, and professional fees, recorded as liabilities under accrual accounting.
  • Deferred revenue
    Deferred revenue is a liability for cash received or billed before goods or services are delivered, released to revenue as performance obligations are satisfied under ASC 606.

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