Determining a company’s financial performance requires an understanding of how to calculate net income using the accrual basis. The accrual basis of accounting is a method of recording revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.
This method provides a more accurate picture of a company’s financial performance than the cash basis of accounting, as it reflects all of the company’s transactions, regardless of when cash is exchanged. As a result, the accrual basis is required by Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS).