Accrual basis of accounting is a method of recording financial transactions where revenue or expenses are recognized when earned or incurred, regardless of when the related cash is received or paid. This means that transactions are recorded in the period in which they occur, rather than when payment is received or made.

Under the accrual basis, revenue is recognized when earned, which means when the goods or services have been delivered or performed, even if payment has not been received. Expenses are recognized when incurred, which means when goods or services have been received, even if payment has not been made. This is in contrast to the cash basis of accounting, where revenue is recognized when cash is received, and expenses are recognized when cash is paid.

The accrual basis of accounting provides a more accurate picture of a company's financial performance, as it takes into account all revenues and expenses, including those that have not yet been paid or received. This method allows for a more realistic representation of a company's financial health, and is the basis for Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Here's an example to illustrate the accrual basis of accounting:

Let's say a company sells $10,000 worth of products in December, but the customer does not pay until January of the following year. Under the accrual basis of accounting, the company would record the revenue in December, when it was earned, even though the cash was not received until the following year.

The journal entry to record the sale would be:

Accounts receivable (asset) $10,000

Revenue (income) $10,000

Even though the cash was not received at the time of the sale, the company has still earned the revenue and should record it in its financial statements.

Similarly, if the company purchases $5,000 worth of inventory in December, but does not pay the supplier until January of the following year, the company would record the expense in December, when it was incurred, even though the cash was not paid until the following year.

The journal entry to record the purchase would be:

Inventory (asset) $5,000

Accounts payable (liability) $5,000

Again, even though the cash was not paid at the time of the purchase, the company has still incurred the expense and should record it in its financial statements.