Accrual Accounting

What Is Accrual Accounting?

Under accrual accounting, transactions are recorded when they happen economically rather than when money moves. If you complete a $10,000 project in January but the client pays in March, you record the revenue in January. Similarly, if you receive an electricity bill in December but pay it in January, the expense is recorded in December.

This contrasts with cash-basis accounting, where transactions are only recorded when money actually enters or leaves your bank account.

Why It Matters for Your Business

Accrual accounting provides a more realistic view of profitability and financial obligations, which is why it is the standard under Generally Accepted Accounting Principles (GAAP).

• Accurate financial picture: Revenue and expenses are matched to the period they belong to, giving you a true view of monthly and quarterly performance.
• Better decision-making: When you can see all earned revenue and incurred costs, you make smarter choices about spending, hiring, and investing.
• Investor and lender expectations: Banks and investors typically require accrual-basis financial statements because they reveal the full story of a business.

Consider a landscaping company that does $20,000 of work in November but does not collect payment until January. Under cash accounting, November looks like a bad month and January looks great. Accrual accounting shows the true picture: the work and revenue belong in November.