Accrual accounting is a system that records all financial transactions based on when they take place, not when the money is actually exchanged. That means income and expenses are recorded when they’re earned or incurred, rather than when they appear in the bank account. With accrual accounting, business owners get an accurate understanding of their financial health by tracking all financial activity regardless of whether or not there is an actual cash exchange. This type of accounting gives businesses a reliable way to measure costs and profits over time.