The accrual basis of accounting is a system of accounting which assumes that revenue and expenses are recognised when earned or incurred respectively. However the cash basis of accounting says that revenues and expenses are only recognised when they are received or paid respectively. For instance, a company provides advertisement services. The accrual basis of accounting will recognise the revenue when the service is rendered even though the payment has not been received yet whereas the cash basis will record the revenue earned only when the payment for the service is done.
The financial statements like income statement and balance sheet follow the accrual basis. However, some users of the financial statements require the cash flow of a business and hence the statement of cash flow is made to show the cash flow of the business during a certain period of time.
According to the time period assumption, it is possible to make financial statements for a business that fairly shows the financial position of a business for a specific period of time. Even if artificial divisions are not made on the indefinite future of a business, it will still be possible to know the profit earned by the owners when the business is dissolved. This can be done by deducting the amount left in the business at the end from the initial investment made in the starting of the business. However, potential investors, stockholders and creditors constantly need to know the position of the business while it is in operation to make economic decisions. They cannot wait till the business liquidates to know this information as it will be irrelevant at that point. Therefore, accrual basis of accounting is needed as it will facilitate on the making of periodic financial statements.
Revenue causes an increase in assets and a reduction in liabilities when goods and services are provided to customers. An asset is not always associated with revenue.