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What is Accrual accounting?

Accrual accounting records income when earned and expenses when incurred — not when cash moves. Invoice a client in December and it counts as December revenue, even if they pay in February. It gives the truest picture of performance and is required for larger businesses under GAAP.

In practice

A contractor finishes a $50,000 job December 28 and invoices it. Under accrual accounting, that's 2026 revenue — even though the check arrives in 2027.

Related terms

  • Cash accounting — Recording income and expenses only when cash changes hands.
  • Ledger — The master chronological record of all business transactions.
  • Accounts receivable — Money owed to the business by its customers.

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Frequently asked questions

Who has to use accrual accounting?

In the US, generally businesses with over $30 million in gross receipts, plus any business carrying inventory. Everyone else can usually choose.

Why is accrual considered more accurate?

It matches income to the work that earned it and expenses to the revenue they supported — so a month's profit reflects that month's real performance.

Can I switch from cash to accrual?

Yes, with IRS approval (Form 3115) and a one-time adjustment for the difference. Get an accountant involved — the transition year is tricky.