Accrual Accounting

What is accrual accounting?

Accrual accounting records financial transactions when they occur, not when cash changes hands. If you complete a job in March but get paid in April, accrual accounting counts that revenue in March. Similarly, if you receive materials in March but pay for them in April, the expense is recorded in March.

This method provides a more accurate picture of your business's financial activity during any given period.

Accrual vs. cash basis accounting

The two main accounting methods differ in timing:

• Accrual accounting — Records income when earned and expenses when incurred
• Cash basis accounting — Records income when received and expenses when paid

Cash basis is simpler but can misrepresent your financial situation. Accrual accounting shows the full picture but requires more careful tracking.

Who uses accrual accounting?

Larger businesses are often required to use accrual accounting. Small businesses can usually choose either method, though once you pick one, changing requires IRS approval. Many small business owners start with cash basis for simplicity and switch to accrual as they grow.