accrual method of accounting

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Accrual method of accounting is the method used by most large businesses in reporting their liabilities and expected income. The accrual method requires businesses to report all economic transactions, whether liabilities or income “when all the events have occurred which fix the right to receive such income” (Treasury Regs. §1.451-1(a)). 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]