What is the purpose of accrual accounting?

The purpose of accrual accounting is to match revenues and expenses to the period in which they occur. This method provides a more accurate picture of a company's financial performance and position by recognizing income when it is earned and expenses when they are incurred, regardless of when cash changes hands. This matching principle helps ensure that financial statements reflect all relevant transactions within the correct accounting period, giving users of the financial statements a clearer understanding of the company’s profitability and financial health during that time. This approach contrasts with cash accounting, which only records transactions when cash is exchanged, potentially leading to misleading conclusions about a company's actual financial situation.