Accrual Accounting

Expanded Explanation: In accrual accounting, revenues, and expenses are recorded when they are earned or incurred rather than when cash is exchanged. This method provides a more accurate representation of a company’s financial position and performance, as it includes receivables and payables.

Potential Issues: If not accurately managed, accrual accounting can present a misleading picture of a company’s cash position, potentially leading to overestimating financial health and underestimating liabilities.

Example: If your catering business delivers food for an event in late December but receives payment in January, the revenue is recorded in December.