What does "accrual accounting" refer to in the budgeting process?

Accrual accounting is a fundamental principle in the budgeting process that focuses on the timing of financial transactions. It requires that revenue and expenses be recognized when they are incurred, regardless of when cash is actually received or paid. This means that if a service is performed or an obligation is made, the corresponding revenue or expense is recorded at that moment, providing a more accurate picture of an organization's financial position.

This method contrasts with cash accounting, which only recognizes transactions when cash changes hands. By employing accrual accounting, organizations can better match revenues with the expenses incurred to generate them, leading to more informed decision-making and budget planning. This approach is especially important for financial reporting and management, as it allows for a comprehensive view of financial performance over time, rather than merely tracking cash flows.