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.
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.
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.
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.