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Accrual accounting records income when it is earned and expenses when they are incurred—not simply when cash changes hands. That timing can make a business’s results for a period easier to understand, but it also means reported profit may not equal the cash available in its bank account.
What is accrual accounting?
Accrual accounting recognizes business activity in the period it relates to. Revenue is generally recorded when it is earned, and an expense when the business incurs it, even if the related payment happens later.
The U.S. Bureau of Economic Analysis defines accrual accounting as a method that records sales, production, consumption, and employee compensation according to when the underlying activity occurs. For a business, the practical point is that the date cash arrives or leaves does not by itself determine when an item belongs in the accounts. U.S. Bureau of Economic Analysis: Accrual accounting
How is accrual accounting different from cash accounting?
Cash accounting generally reports income when received and expenses when paid. Accrual accounting instead follows when income is earned and expenses are incurred. The same transaction can therefore appear in different periods under the two methods.
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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errors| Question | Accrual accounting | Cash accounting |
|---|---|---|
| When is income generally recorded? | When earned | When received |
| When is an expense generally recorded? | When incurred | When paid |
| What happens to unpaid items? | Earned income not yet collected and incurred expenses not yet paid can appear in the accounts. | Reporting generally follows the timing of cash receipts and payments. |
| What does period profit reflect? | Activity assigned to the period, including some transactions not yet settled in cash. | Cash activity during the period, which can shift income or expenses into a different period. |
When do I record income and expenses under accrual accounting?
Income: when it is earned
Suppose a consultant completes a project in December and sends an invoice due in January. Under the basic accrual approach, the revenue generally belongs to the period in which the service was earned, even though the client pays later. Under cash accounting, the receipt generally appears when the payment arrives.
Expenses: when they are incurred
If a business receives a utility bill in January for service used in December, the expense generally relates to December under the basic accrual approach, although payment may follow in January. The underlying period matters; an invoice’s arrival date is not automatically the only relevant factor.
What are the benefits of accrual accounting?
It makes period performance easier to interpret
Matching income and expenses to the periods in which they belong can make a profit-and-loss statement more informative about business activity. A large customer payment received in January for December work, for example, need not make January appear stronger merely because the cash arrived then. The IRS describes the purpose of an accrual method as matching income and expenses in the correct year. IRS Publication 334 (2025), Tax Guide for Small Business
It shows amounts still to be collected or paid
Accrual records can show revenue already earned but not yet collected, as well as costs already incurred but not yet paid. That provides information about outstanding customer invoices and bills alongside the period’s income and expenses.
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Why accrual profit is not the same as cash available
Because accrual accounting can recognize income before a customer pays and expenses before the business pays a bill, profit for a period is not a measure of the cash sitting in the bank. A business might report December revenue from the consultant’s project while still waiting for the January payment. It may also have a December utility expense before paying the bill.
Read accrual profit alongside cash-flow information and the amounts customers owe and the business owes. Each answers a different question: accrual results help describe performance for a period, while cash tracking shows the timing of money entering and leaving the business.
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What should U.S. small businesses know about tax rules?
The examples above explain the basic bookkeeping distinction; they are not a complete guide to federal tax recognition. For U.S. tax purposes, the IRS says accrual income is generally included when the right to receive it is fixed and the amount can be determined with reasonable accuracy. Expense deductions involve an all-events test and an economic-performance requirement, with additional qualifications. The invoice date alone does not always settle tax treatment. See IRS Publication 334 and IRS Publication 538, Accounting Periods and Methods.
Inventory rules, small-business exceptions, and a taxpayer’s circumstances can affect which methods are available or required. The IRS also says a business generally must obtain approval to change its accounting method after it has been set. These are U.S. federal tax considerations, not universal rules for every country or financial-reporting framework. Check the current IRS guidance for the tax year involved and consult a qualified tax professional about your situation. IRS Publication 583 (12/2024), Starting a Business and Keeping Records
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What recordkeeping does accrual accounting require?
Since the method follows earning and incurring rather than only cash movement, records need to support the transactions and the periods assigned to them. Keep invoices, bills, payment records, and documentation for adjustments organized so entries can be traced to their underlying activity. The IRS says business records should support book entries and tax returns, and that an accounting method should be applied consistently. IRS Publication 583
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