What Is Accrual Accounting?

Under accrual accounting, revenue is recognized when a product is delivered or a service is performed — not when payment is received. Expenses are recorded when they are incurred — not when the invoice is paid. For example, if you complete a $10,000 project in December but don't receive payment until January, accrual accounting records the $10,000 as December revenue. Similarly, if you receive a supplier invoice in December for January delivery, it's recorded as a December expense. Accrual accounting is required for businesses with over $26 million in annual gross receipts (per IRS rules) and is mandatory for publicly traded companies under GAAP and IFRS. It provides investors and lenders with a truer picture of profitability and financial health. The downside is complexity — tracking receivables, payables, and deferred revenue requires more sophisticated bookkeeping than cash accounting.

Choosing between accrual and cash accounting has real implications for how you report income, pay taxes, and understand your business's health. Most small businesses start with cash accounting for simplicity, but as they scale, accrual accounting becomes necessary. An accountant can help you determine which method is right for your current stage and handle the conversion if needed.