Getting the hang of accruals

ACCRUALS are one of the most important concepts that investors have to understand, if they are to read financial statements with a deeper level of understanding. Most accounting statements are based on the accrual, instead of the cash, system of accounting.

In the latter, revenues and expenses are recorded only when they are received or paid out in cash. This might work for very small businesses, but it can present an erroneous picture for investors of larger ones.

Under the accrual system, revenues are recorded once a sale is made and a customer is billed. Whether the customer has paid is irrelevant, though we assume that the customer is of good credit and will eventually pay up.