Accrual Accounting
Recording revenue and expenses when earned or incurred, regardless of cash timing.
Definition
Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of when cash changes hands. This contrasts with cash accounting, which records transactions only when money is received or paid. Accrual accounting provides a more accurate picture of financial performance by matching revenues to the expenses that generated them.
Under accrual accounting, an invoice issued today is recorded as revenue today, even if payment won't arrive for 30 days. Similarly, expenses are recorded when incurred, not when paid. GAAP requires accrual accounting for most businesses above certain size thresholds.
Why It Matters
Accrual accounting matters because it shows the true economic activity of your business. Cash accounting can be misleading: a business might show high cash in a month when they collected old receivables, obscuring that current sales are declining.
For invoicing, accrual accounting means your income statement reflects billed revenue, giving you a real-time view of business performance. The balance sheet shows accounts receivable (money owed to you) and accounts payable (money you owe).
Examples
- 1
A consultant invoices $10,000 in December for work completed. Under accrual accounting, it's December revenue even though payment comes in January.
- 2
A company receives an annual insurance bill of $12,000. Accrual accounting spreads this as $1,000/month expense rather than one month bearing the full cost.
- 3
Year-end financial statements use accrual basis to accurately report the year's economic activity to investors and lenders.
Related Terms
Quick Navigation
Ready to put this into practice?
InvoiceLaunch automates invoicing with built-in payment terms, late fees, and more.
Get Started