What is accrual basis accounting?
Under the accrual basis, you record income when you earn it and costs when you incur them, not when money moves. If you finish a job in March but are paid in April, the revenue belongs to March. This follows the matching principle, which pairs revenue with the expenses that produced it.
It contrasts with the cash basis, where transactions are recorded only when cash is received or paid.
Accrual vs cash basis
- Accrual: more accurate view of profit, required for most companies reporting under IFRS or GAAP, but needs more bookkeeping.
- Cash: simpler and shows cash in hand, but can make a month look great or terrible just because of payment timing.
Common accrual entries
- Accrued expenses: costs incurred but not yet billed (for example, utilities used in December, billed in January).
- Accrued income: revenue earned but not yet invoiced.
- Prepaid expenses: costs paid in advance and spread over the periods they cover.
- Deferred revenue: cash received before the work is done.
Example
A consultant completes a $5,000 project on 28 June and invoices on 3 July. Under accrual accounting the $5,000 is June revenue, with a receivable on the June balance sheet. Under cash accounting it would only appear when paid.
Who should use it
Growing businesses, companies with inventory, those seeking investment or loans, and anyone required to produce IFRS or GAAP statements. Some tax authorities let small businesses use cash accounting for tax while keeping accrual books.