An accrual income statement is a financial document devoted to a company's income over a period of time with revenue and expense totals recorded at the time in which business transactions take place. This is in contrast to a cash-based statement, which records the revenue and expenses at the time when payments for transactions are actually rendered. Most large corporations must use an accrual income statement because it is preferred by generally accepted accounting principles. By using this type of income statement, businesses have an accurate sense of profits and loss, since revenue and expenses are matched up with the time they occur.
Companies are required by investors, lenders, and regulators to produce an accurate representation of their financial conditions. They accomplish this by providing financial statements showing important aspects of business like cash flow, net worth, and net income. Net income is represented in the income statement, which takes all of the revenue earned from sales and subtracts from it all of the expenses amassed in the process of those sales. An accrual income statement is the preferred method of representing income by those with an interest in knowing the true amount a company has earned at the time in which it was earned.
What the accrual income statement accomplishes is the matching of revenue and expenses to the actual time of transaction. The cash method, by contrast, is more concerned with when money is paid by and to the company. A discrepancy between these two methods exists because many companies pay and get paid by credit, meaning that the actual money changes hands after the transaction takes place.
As an example of how an accrual income statement works, imagine that a company performs a service for a customer in exchange for $500 US Dollars (USD) in the month of May. The customer, operating on a credit arrangement, doesn't actual remit payment until the month of June. With the accrual method, the $500 USD revenue for this transaction would be added to the total for May. A cash income statement, on the other hand, would show the $500 USD revenue in June.
Generally accepted accounting principles stipulate that companies beholden to stockholders and regulators must use the accrual income statement. This is because the accrual method shows the profits and losses at the time they are actually being made. The cash method can skew net income totals if there is a great span between the time when products are sold or services are rendered and the time when payments are made.
