Accrual accounting records income when it is earned and expenses when they are incurred, in the period they belong to, whether or not cash has changed hands. Under IFRS, every financial statement except the cash flow statement is prepared on the accrual basis. It shows performance more faithfully than counting cash in and out.
What is accrual accounting?
The IFRS Conceptual Framework (paragraph 1.17) describes accrual accounting as showing the effects of transactions in the periods in which they happen, even when the cash is received or paid in a different period. It explains why: what a company owns and owes, and how that changes, says more about its performance than its cash receipts and payments alone.
IAS 1 (paragraph 27) requires financial statements, except cash flow information, to be prepared on the accrual basis. The cash flow statement is the exception, because its job is to show the cash. IFRS 18 replaces IAS 1 for annual periods beginning on or after 1 January 2027, and moves some IAS 1 paragraphs to IAS 8.
How does accrual accounting differ from cash accounting?
| Situation | Cash basis records it | Accrual basis records it |
|---|---|---|
| Services delivered in December, paid in January | In January | As December revenue, with a receivable |
| Electricity used in December, billed in January | In January | As a December expense, with an accrual |
| A year of insurance paid in advance in January | All in January | Spread over the twelve months, as a prepaid expense |
| A customer pays a year’s subscription upfront | All on receipt | As revenue month by month, the rest held as deferred revenue |
In practice, the month-end accruals are the adjustments that turn the ledger into an accrual-based one: costs incurred but not yet billed, income earned but not yet invoiced, and the release of amounts paid or received in advance. Getting the cut-off right is what makes them correct.
What does accrual accounting change in practice?
Why does accrual accounting matter for finance teams in the GCC?
In Saudi Arabia, SOCPA applies international standards: to companies listed on the financial market from financial statements starting 1 January 2017, and to other entities from periods beginning 1 January 2018, while small and medium-sized entities with no public accountability may use the IFRS for SMEs Standard. Running monthly management accounts on the same accrual basis means the year end is a smaller step, and the monthly results can be compared with the budget on the same footing.
Questions people ask
What is the difference between an accrual and a provision?
An accrual is a cost incurred where the amount and timing are fairly certain, such as an unbilled utility charge. A provision is a liability of uncertain timing or amount, such as a legal claim, and is recognised under IAS 37 when an outflow to settle it is probable.
Do small companies have to use accrual accounting?
That depends on the reporting framework that applies to them. In Saudi Arabia, entities without public accountability may use the IFRS for SMEs Standard. Check the framework that applies to your company with your auditor or adviser.
Does accrual accounting affect cash?
No. It changes when income and costs are reported, not when cash moves. That is why a profitable company can still run short of cash, and why the cash flow statement sits alongside the income statement.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.
- AASB Conceptual Framework for Financial Reporting (May 2019), which incorporates the IASB Conceptual Framework: paragraph 1.17 on accrual accounting (read 9 October 2026)
- AASB 101 Presentation of Financial Statements (compiled December 2021), the Australian standard that incorporates IAS 1: paragraphs 27 and 28 on the accrual basis (read 9 October 2026)
- IFRS Foundation: IFRS 18 Presentation and Disclosure in Financial Statements (standard page) (read 9 October 2026)
- IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets (standard page) (read 10 October 2026)
- SOCPA: Overview of Professional Standards (application of international standards in Saudi Arabia) (read 9 October 2026)