Accrual-basis accounting recognizes revenues when they are earned and expenses when they are incurred in the production of that revenue. In contrast, cash-basis accounting recognizes cash when the cash is received. These concepts are sometimes difficult to understand. Generally, we think of getting or earning revenue whenever we receive money. This recognition method would be cash-basis accounting.
Most accountants use the accrual-basis of accounting for businesses.
All large corporations use the accrual-basis of accounting. GAAP says when it is earned , that's when revenue is recognized , that is, included on the income statement. When Tom delivers a shirt to a customer, he has earned the revenue. This is called the revenue recognition principle . When one of Tom's friends says he is going to buy a T-shirt next week, no revenue is recognized.