Finance term
Accrual Accounting
Also known as: accrual basis, accrual method
Definition
Accrual accounting records revenue when it is earned and expenses when they are incurred — regardless of when cash actually changes hands. It contrasts with cash-basis accounting, which records transactions only when money moves. Accrual gives a more accurate picture of profitability across periods.
Detailed explanation
Under the accrual method, a sale is booked when the product ships or the service is delivered (creating an account receivable), and an expense is booked when the obligation is incurred (creating an account payable) — not when the invoice is paid. This matches revenue to the expenses that generated it, which is why lenders and investors generally prefer accrual statements for underwriting.
The IRS sets the rules on accounting methods and which businesses must use accrual in Publication 538 (https://www.irs.gov/publications/p538); larger businesses and those carrying inventory are often required to use it above a gross-receipts threshold. Accrual statements drive metrics like EBITDA and retained earnings, and they make deferred revenue visible — cash that has been collected but not yet earned.
◈ Worked example
- A contractor finishes a $40,000 job in March but is paid in May — accrual books the revenue in March
- A business receives a utility bill in December for December usage — accrual records the expense in December even if paid in January
- Annual software subscription collected upfront is recorded as deferred revenue and earned month by month under accrual
Common questions
The most-asked questions about Accrual Accounting — answered straightforwardly.
What is the difference between accrual and cash accounting? +
Cash accounting records revenue and expenses only when cash moves; accrual records them when earned or incurred. Accrual better matches income to the period that produced it but is more complex.
Is accrual accounting required? +
It depends. The IRS (Publication 538) requires accrual for many larger businesses and those with inventory above a gross-receipts threshold; smaller businesses may use the cash method.
Further reading
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