Simply put, accrual-based accounting recognizes revenues when earned and expenses when incurred. An entity may recognize revenues or expenses using an accrual-based accounting system even if cash has not yet been exchanged. In other words, the entity includes revenue earned once the service has been performed or the product has been shipped. The entity recognizes whatever expenses were incurred to earn those revenues even if it has not moved any cash to pay for those expenses.
Government-Wide Financial Statements and Enterprise Funds follow the accrual-based accounting for entities following Governmental Accounting Standards Board (GASB) guidelines. Not-for-profit entities following Financial Accounting Standards Board (FASB) guidelines also use accrual-based accounting methods.
For a review of the types of entities that follow GASB versus FASB accounting guidelines, please refer to Part One in this series, "On What Basis Are You Accounting for That".