The principle of accrual (also called matching) is fundamental to accounting. It requires that costs should be matched to the revenues they generate.

This means, for example, that cost of an asset should be depreciated over its useful life rather than the entire cost being charged against profits when it is purchased.

It also means that sales are recognised when they are made, rather than when cash is received - so sales and purchases on credit are usually included in profit and loss account in the year the sale was invoiced in, rather than when payment is received.

There are more elaborate methods for dealing with issues such as long term projects that are partially completed. See revenue recognition.

The Accrual Principle

The Accrual Principle may be called the mother of all accounting principles. It ensures that revenues and expenses are booked (recorded) when earned and incurred and not necessarily when cash is exchanged

Definition

Fundamental accounting concept which recognizes the time lag between sales and purchases on one hand, and collection and payment of cash on the other. It forms an important part of the GAAP, and permits meaningful comparisons based on the actual operations of the business undisturbed by the timing of payments. Under this principle, sales and expenses are taken account of in the accounting period in which they occur (and are included in the income statement for that period), whether or not cash was received or paid out. Also called accrual concept. See also accounting concepts.

The accrual principle
Your accounts should reflect things when they arise or are earned - which is not necessarily the same as when you actually pay or are paid for them. For example, your accountant will include an April sales invoice in your April accounts, even if your customer doesn't pay you until August.