Accrual Method
From ForcaWiki, the simple encyclopedia
| In one sentence | An accounting approach that counts money as earned or spent the moment it is owed, not whenever cash actually changes hands. |
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| Category | Finance |
| Related | Cash Method, Revenue, Costs |
Imagine you mow a neighbor's lawn on Monday, and they tell you they will pay you on Friday. Even though the cash has not landed in your hand yet, you already did the work and you are already owed the money.
The accrual method is an accounting approach built around that idea. It records income and expenses the moment they are earned or owed, called being "incurred" or "accrued," rather than waiting until the cash is actually paid or received. In the lawn mowing example, the accrual method would count that money as earned on Monday, the day you did the work, not on Friday, the day you actually got paid.
Why businesses use it
The accrual method gives a clearer, more honest picture of how a business is really doing at any given moment, since it counts money that is owed even before it physically arrives. This matters a lot for movies, since a film can earn a lot of Revenue from a deal long before the check actually shows up.
Fun facts
- The opposite approach, counting money only once cash actually changes hands, is called the Cash Method.
- Most larger businesses, including movie studios, are required to use the accrual method for their official books.
- Accrual accounting can make a business look profitable on paper even during a stretch when very little actual cash has come in yet.