What is Accrual Accounting?

Under accrual accounting, a sale is recorded when you deliver the goods or perform the service, even if the customer pays next month. An expense is recorded when you receive the goods or services, even if you pay the bill later. The result is a profit and loss that matches revenue with the costs of earning it in the same period.

Example

A consultant finishes a project in December and invoices $8,000, paid in January. Under accrual accounting, the $8,000 is December revenue and appears in accounts receivable at year end. Under the cash method it would be January revenue.

Why it matters

Accrual reports show performance more accurately, especially for businesses with significant receivables, payables or inventory. Lenders and investors usually expect them. For tax purposes, the IRS explains in Publication 538 which businesses may use the cash method and which must use accrual, and that changing methods generally requires consent.

In practice

Many small businesses keep accrual books for management and file taxes on the cash method where allowed. Good bookkeeping makes both views available. Compare with cash method accounting and read our guide to cash vs accrual accounting.

Related terms

• Cash Method Accounting: The cash method records income when money is received and expenses when they are paid.
• Accounts Receivable: Accounts receivable is money customers owe your business for goods or services already delivered.

Browse more definitions in the small business glossary.