TL;DR

Accrual accounting records income when you earn it and expenses when you owe them — not when cash changes hands. It gives a more accurate long-term financial picture but requires tracking receivables and payables carefully.

Key Points

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Accrual accounting gives a more accurate view of business performance over time, especially for seasonal or project-based businesses

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Required by GAAP (Generally Accepted Accounting Principles) for publicly traded companies and larger businesses

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Under accrual, your books can show strong revenue while cash in the bank remains low if clients haven't paid yet

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The IRS generally requires businesses with inventory or those exceeding $30 million in revenue to use accrual accounting

How Accrual Accounting Works

Under accrual accounting, you record revenue when you've earned it — typically when you deliver goods or services and issue an Invoice — even if the client hasn't paid yet¹. That receivable sits in Accounts Receivable until it's collected. Similarly, you record an expense when you receive a bill — even if you haven't paid it yet. That payable sits in Accounts Payable. This means your financial statements show the economic substance of transactions when they happen, not when cash moves — providing a more accurate picture of your business's actual performance.

Accrual vs. Cash Basis

The contrast with Cash Basis Accounting is significant. In June, a cash basis freelancer who completes a $5,000 project but hasn't been paid yet shows $0 June revenue. An accrual freelancer shows $5,000 June revenue with a corresponding AR balance. For decision-making, accrual is more informative — it shows how the business is actually performing. For simplicity and tax planning, cash basis has advantages. Most freelancers and small service businesses use cash basis, while businesses with inventory, complex contracts, or outside investors typically need accrual. Both methods are valid; the choice affects how you report and pay taxes.

Accrual Accounting and Financial Statements

Accrual-based books produce more complete financial statements. The Balance Sheet shows both your AR (money owed to you) and AP (money you owe), giving a true picture of net financial position. The Profit & Loss Statement statement reflects earned revenue and incurred expenses for the period, even if the cash movements straddle period boundaries. This matters enormously for understanding your business's true profitability and for attracting lenders or investors who need accurate financial statements. If you're ever trying to secure a business loan, accrual-based books — or restating cash basis books to accrual — will be required.

References

FreshBooks — What Is Accrual Basis Accounting? A Complete Guide ↗

freshbooks.com

AccountingCoach — Accounting Basics Explanation ↗

accountingcoach.com

Last updated: June 9, 2026

Related Terms

Cash Basis Accounting

An accounting method in which revenue is recorded when cash is actually received and expenses are recorded when they are actually paid, regardless of when they were earned or incurred.

Accounts Receivable

Money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

Accounts Payable

Money a business owes to its vendors, suppliers, or contractors for goods and services received but not yet paid for.

Balance Sheet

A financial statement that shows a business's assets, liabilities, and owner's equity at a specific point in time, providing a snapshot of the company's financial position.

Profit & Loss Statement

A financial statement that summarizes all revenues, costs, and expenses over a specific accounting period, showing whether a business made a profit or incurred a loss.

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