When the accruals basis of accounting is used a best attempt is made to match the income earned during a period with the expenses incurred to generate that revenue regardless of when the resulting cash flows that arise as a consequence are received or paid. This is considered to reflect a matching principle that should result in the most accurate available representation of a reporting entity's performance during a period and its resulting financial position as reflected on its balance sheet.

Using the accrual basis, revenue is recognised when it is earned i.e. when it is contractually due, and not when cash is received (albeit in some cases they might be the same). Likewise, expenses are recognised when they are incurred, regardless of when the actual payment is made.

The accruals basis requires recognition of a number of matters that can be ignored in cash flow accounting, including:

• Tangible fixed assets, which are expensed over time through depreciation charges;
• Intangible fixed assets, which are expensed over time through amortisation charges;
• Stock and work in progress, which represent the value of items bought for use in a trade but not yet matched with revenue earning activity;
• Trade debtors, i.e. sums owing by customers;
• Prepayments, i.e. expenditure incurred where the benefit has not yet been received e.g. on insurance premiums or rents paid in advance;
• Trade creditors, i.e. sums owing to suppliers;
• Accruals, i.e. liabilities owing for services supplied but not yet invoiced e.g. on services charged in arrears;
• Income in advance i.e. sums paid for work to be done which has not yet been delivered e.g. deposits;
• Loans;
• Provisions;
• Share and other capital.

The balance sheet of a reporting entity does, in effect, only exist because of the adoption of the accruals basis of accounting.

The estimation of some of the items noted above might involve a considerable degree of judgement. Accruals accounting is inherently less objective than cash flow accepting as a result, even if it is considerably more useful in measuring an approximation to economic income.

Accrual accounting is required by almost all generally accepted accounting principles (GAAP) such as those issued by the International Financial Reporting Standards Foundation. It is also usually used as the basis of taxing those earning income from trading in most countries although some, like the UK, allow smaller businesses to adopt a cash flow basis instead. This measures income as the surplus of cash generated during a period from trading activities.