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Also known as: accrual basis, accrual method

Accrual Accounting

ConceptualFinance

Definition

Accrual Accounting: Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. This differs from cash accounting, which records transactions when money moves. Accrual better reflects economic reality and is required for GAAP compliance as companies scale.

Example Usage

“With accrual accounting, we recognize our annual contracts as monthly revenue even though cash came upfront. It smooths our P&L.”

Common Misconceptions

Cash accounting is simpler, so use it. Accrual better represents business health and is required at scale.
Accrual means more revenue. It spreads revenue over service periods; annual prepayments become monthly recognition.
Only accountants care about accrual vs. cash. The choice affects how you understand business performance.

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