Determining net income under the accrual basis of accounting is a critical financial calculation for businesses. The accrual basis requires recording transactions when they occur, regardless of when cash is exchanged. For instance, a company may record a sale when the order is placed, even if payment is not received until later.
The accrual basis provides a more accurate representation of a company’s financial performance over a specific period. It ensures that revenues and expenses are matched to the period in which they are earned or incurred, leading to a more reliable assessment of profitability. Historically, the accrual basis gained prominence in the early 20th century as businesses sought to improve the accuracy and consistency of their financial reporting.