Money Matters

Accrual basis accounting: What it is, benefits, and examples

Learn more about accrual basis accounting, including the benefits of this approach and why it might be the best accounting method for your business.

Published August 17, 202615 min read Share

This article was originally published on February 17, 2025, but has been refreshed and re-published with new content on August 17, 2026.

Accrual basis accounting records income and expenses when the related business activity happens—not simply when cash moves in or out of your account. That timing gives you a clearer view of what your business earned, what it spent, what customers owe, and which bills remain unpaid during each reporting period.

This guide explains how the accrual accounting method works, the principles behind it, when it is a good fit, and the benefits, drawbacks, and practical examples to consider. You’ll also learn why a business can report a profit before the related cash reaches its bank account.

Key takeaways

• Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid.
• The accrual method of accounting uses accounts receivable, accounts payable, prepaid expenses, and deferred revenue to track transactions across payment periods.
• Accrual-based accounting gives businesses a clearer view of profitability, outstanding obligations, and money still due from customers.
• Financial statements prepared under US Generally Accepted Accounting Principles (GAAP) use the accrual basis of accounting.
• Because accrual accounting can show profit before the related cash arrives, businesses should monitor cash flow alongside their financial reports.

Here’s what we’ll cover

What is accrual basis accounting?

Accrual basis accounting is a method that records revenue when it is earned and expenses when they are incurred, regardless of when payment is received or made. By placing transactions in the reporting period they belong to, it gives you a more accurate view of financial performance than looking at cash movement alone.

An accrual is an adjusting entry used to record income the business has already earned or a cost the business has incurred before the related cash transaction is complete.

Accrual basis accounting in simple terms

Think of accrual accounting as recording the work when it happens, not when the money moves. If you complete and invoice a client project in March but receive payment in April, you record the revenue in March because that is when you earned it. The amount due remains in accounts receivable until the customer pays.

The accrual accounting method is guided by two key principles: revenue recognition, which determines when revenue is earned, and matching, which places related expenses in the appropriate accounting period. Together, these principles help financial reports show a clearer picture of profitability, assets, and liabilities.

Financial statements prepared under US Generally Accepted Accounting Principles (GAAP) use accrual accounting, making the method especially important for businesses that need consistent, standardized financial reporting.

How does accrual basis accounting work?

In practice, accrual basis accounting uses accounts that track transactions between the time business activity occurs and the time cash is exchanged.

For example:

• Revenue that has been earned and invoiced but not yet collected is recorded in accounts receivable.
• A supplier invoice received but not yet paid is recorded in the relevant expense or asset account and accounts payable.
• An expense incurred before an invoice arrives, such as wages or utilities, is recorded as an expense and an accrued liability.

When payment is received or made, the cash account is updated and the related receivable or liability is cleared. Period-end reviews and adjustments help ensure these balances remain accurate from one reporting period to the next.

What are the core principles of accrual basis accounting?

Accrual basis accounting relies on two principles—revenue recognition and matching—to place income and related costs in the appropriate reporting period.

Revenue recognition principle

The revenue recognition principle requires a business to record revenue when or as it delivers the promised product or service to the customer, rather than when payment is received.

For example, imagine your custom furniture business completes and delivers a client’s order in August, but the customer does not pay until September. Under accrual basis accounting, you record the revenue in August because that is when the business fulfilled its obligation and earned the income.

Matching principle

The matching principle records expenses in the same period as the related revenue, where a direct relationship can be identified.

Continuing with the furniture example, suppose the business incurred $1,800 in materials and labor to complete the August order. Those costs should also be recorded in August so they appear alongside the revenue from the sale.

Together, the two principles place the sale and its related costs in August.

What are some accrual accounting examples?

Common accrual accounting examples include recording project revenue before payment is received, matching inventory costs to the products sold, and spreading subscription revenue across the service period. These examples show how the accrual method separates payment timing from business performance, so revenue and expenses appear in the periods they belong to.

Here’s how that works across three common business models.

Project-based service business

BluePrint Design Studio completes an $8,000 client project in September and incurs $3,000 in freelance and material costs during the same month. The customer pays the invoice in October.

Under the accrual accounting method, BluePrint records $8,000 in revenue and $3,000 in expenses in September. This shows a $5,000 gross profit before other operating costs.

When a customer pays in October, BluePrint increases cash and clears the accounts receivable balance, but it doesn’t record the revenue again.

Inventory business

A retailer purchases 100 products for $20 each in June and agrees to pay the supplier in July. The retailer records $2,000 as inventory and $2,000 as accounts payable when the products are received.

During June, it sells 60 of those products for $35 each. The retailer records $2,100 in sales revenue and $1,200 in cost of goods sold. The remaining $800 cost of unsold products stays on the balance sheet as inventory.

When the retailer pays the supplier in July, it reduces cash and clears the accounts payable balance. The payment does not change the gross profit already recorded in June.

Subscription business

A software provider receives $2,400 in January for 12 months of customer support. Assuming the service is provided evenly throughout the year, the business initially records the payment as deferred revenue and recognizes $200 as revenue each month.

This prevents the full payment from appearing as revenue in January and gives the business a clearer view of recurring revenue across the year.

What are common adjusting entries in accrual accounting?

Common accrual accounting entries include deferred revenue, accrued revenue, prepaid expenses, and accrued expenses. These entries help businesses record revenue and costs in the periods they relate to, even when payment occurs earlier or later.

Deferred revenue

Deferred revenue, also called unearned revenue, is money a business receives before delivering the related product or service. It is initially recorded as a liability because the business still owes the customer something.

Suppose a customer pays $1,200 in January for a 12-month software subscription.

When the payment is received:

Debit: Cash $1,200

Credit: Deferred revenue $1,200

Each month as the service is provided:

Debit: Deferred revenue $100

Credit: Revenue $100

Accrued revenue

Accrued revenue is income a business has earned but has not yet invoiced or received.

Suppose you complete $300 of consulting work in January but will not invoice the client until February.

In January, when the service is provided:

Debit: Accrued revenue $300

Credit: Consulting revenue $300

In February, when the client is invoiced:

Debit: Accounts receivable $300

Credit: Accrued revenue $300

When payment is received:

Debit: Cash $300

Credit: Accounts receivable $300

Prepaid expenses

Prepaid expenses are payments made in advance for goods or services that will benefit the business in future accounting periods. They are initially recorded as assets.

Suppose a business pays $1,200 in January for 12 months of insurance coverage.

When the payment is made:

Debit: Prepaid insurance $1,200

Credit: Cash $1,200

Each month as the coverage is used:

Debit: Insurance expense $100

Credit: Prepaid insurance $100

Accrued expenses

Accrued expenses are costs a business has incurred but has not yet paid or received an invoice for.

Suppose a business uses an estimated $200 of electricity in October but will not receive the utility bill until November.

At the end of October:

Debit: Utilities expense $200

Credit: Accrued expenses $200

When the invoice is received, assuming it matches the estimate:

Debit: Accrued expenses $200

Credit: Accounts payable $200

If the invoice differs, the business would need to adjust the difference.

When the invoice is paid:

Debit: Accounts payable $200

Credit: Cash $200

How does accrual accounting affect financial statements?

Accrual accounting shapes what appears on the income statement and balance sheet, while the cash flow statement shows how reported profit compares with the cash that actually moved during the period.

Income statement

The income statement records revenue when it is earned and expenses when they are incurred. This means net income reflects the business activity completed during the reporting period rather than only the cash received or paid.

Balance sheet

The balance sheet records unpaid customer invoices as accounts receivable and outstanding obligations as accounts payable or accrued liabilities. Prepaid expenses appear as assets, while customer payments received before services are delivered appear as deferred revenue liabilities.

These balances show what the business expects to collect, what it owes, and which payments relate to future reporting periods.

Cash flow statement

The cash flow statement shows the cash that entered and left the business. Under the indirect method, it starts with accrual-based net income and adjusts for noncash items and changes in accounts such as accounts receivable, accounts payable, prepaid expenses, and deferred revenue.

What is the difference between cash basis and accrual basis accounting?

Cash basis accounting records revenue and expenses when cash is received or paid. Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when payment occurs.

The accounting method a business uses affects how its profitability, outstanding obligations, and available cash appear in its financial reports.

Factor	Cash basis accounting	Accrual basis accounting
Timing	Records revenue when cash is received and expenses when cash is paid.	Records revenue when earned and expenses when incurred.
Accounts receivable and payable	Does not recognize unpaid invoices as accounts receivable or accounts payable in cash-basis financial statements.	Records customer debts as accounts receivable and unpaid supplier bills as accounts payable.
View of financial performance	Shows cash activity but may not reflect unpaid income or outstanding costs.	Shows revenue earned and expenses incurred, providing a fuller view of profitability.
Complexity	Usually simpler, with fewer adjustments required.	Requires more detailed records and periodic adjustments.
Often suited to	Smaller businesses with straightforward, mainly cash-based transactions, subject to tax rules.	Businesses managing credit, inventory, subscriptions, long-term projects, or complex transactions.
Cash flow visibility	Shows cash received and paid directly.	Can show profit before cash is received, so cash flow must be monitored separately.
Financial reporting standards	Does not comply with US GAAP.	Used to prepare financial statements under US GAAP.
Tax timing	Generally recognizes income and expenses when cash is received or paid, subject to tax rules.	Generally recognizes income when earned and expenses when incurred, subject to tax rules.

Neither method is universally better. Cash basis accounting can simplify record-keeping for eligible businesses with straightforward transactions, while the accrual accounting method provides greater insight into performance across reporting periods.

For a more detailed comparison, explore our guide to cash vs. accrual accounting.

When should a business use accrual basis accounting?

Accrual basis accounting is usually a better fit when a business needs to track money owed, compare performance across reporting periods, or manage inventory, subscriptions, and long-term projects. It may also be required for financial reporting or federal tax purposes in some circumstances.

When is accrual accounting a good fit?

Consider using the accrual accounting method when:

• You sell or purchase on credit: accounts receivable and accounts payable show what customers owe and which bills remain unpaid.
• You manage subscriptions or long-term projects: revenue and costs are recorded as services are provided or work is completed, giving you a clearer view of performance over time.
• You carry inventory: accrual basis accounting matches the cost of products sold with the revenue those sales generate.
• You are preparing for growth or funding: accrual-based financial statements give investors a more complete view of profitability, assets, liabilities, and financial commitments.

When may accrual accounting be required?

Businesses preparing financial statements under GAAP use accrual basis accounting.

Federal tax rules may also restrict whether a business can use the cash method. For tax years beginning in 2026, the gross receipts threshold under section 448(c) is $32 million, based on average annual gross receipts for the previous 3 tax years.

Eligibility also depends on factors such as the business’s entity type, tax-shelter status, inventory treatment, aggregation rules, and applicable exceptions.

Changing an established accounting method usually requires IRS consent, usually requested by filling in Form 3115, Application for Change in Accounting Method. It’s best practice to speak to an accountant or tax professional before proceeding.

Why is accrual basis accounting important?

Cash timing can hide what’s really happening in a business. Accrual basis accounting cuts through that noise by showing the revenue earned and costs incurred in the period they belong to—even when customers pay later or bills arrive afterward.

This clearer view helps you see which projects, products, and services are driving profit, where costs are rising, what customers still owe, and which payments are coming due. It gives you a stronger foundation for pricing, budgeting, investment, and growth decisions.

What are the advantages and disadvantages of accrual accounting?

Accrual accounting provides deeper insight into financial performance, but it also requires more detailed records and closer cash flow management. The main advantages and disadvantages are:

Area	Advantages of accrual accounting	Disadvantages of accrual accounting
Financial performance	Matches revenue and related expenses to the periods they belong to, providing a clearer view of profitability	Reported profit may not reflect the cash currently available
Planning and decisions	Includes receivables, payables, and other obligations, supporting stronger budgets, forecasts, and business decisions.	Reliable analysis depends on consistent records, estimates, and adjusting entries.
Reporting and stakeholders	Produces more comparable financial statements and gives investors and lenders a fuller view of assets, liabilities, and performance.	Requires more detailed accounting processes and may increase software, staffing, or professional support costs.
Business growth	Supports businesses managing credit, inventory, subscriptions, long-term projects, or more complex operations.	May be more work than necessary for eligible businesses with simple, mainly cash-based transactions.
Cash flow and tax timing	Separates financial performance from payment timing, helping businesses identify outstanding income and obligations.	Businesses must monitor cash flow separately. If a business also uses the accrual method for tax, it may need to report taxable income before the customer pays, creating additional cash flow pressure.

What are the best practices for accrual accounting?

Strong accrual accounting depends on a disciplined monthly routine. Recognize revenue consistently, record accruals on time, reconcile the accounts that carry balances between periods, document key decisions, and keep cash flow firmly in view.

Apply revenue recognition consistently

Set a clear policy for when revenue is earned and apply it consistently each period. For subscriptions, long-term contracts, or bundled products and services, recognize revenue as the business delivers what it promised and document the method used. This reflects the principle that revenue is recognized as performance obligations are satisfied.

Standardize accruals and review estimates

Create a repeatable month-end process for recording recurring costs such as payroll, utilities, interest, and professional fees that have not yet been invoiced. Compare estimates with the final amounts, reverse or adjust entries when needed, and refine the method as costs change.

Accrual accounting also relies on estimates for items such as bad debts and warranties. Review these regularly and update them when better information becomes available.

Reconcile key accounts every month

Review accounts receivable, accounts payable, accrued liabilities, prepaid expenses, and deferred revenue as part of the monthly close. Regular reconciliations help finance teams find missing entries, duplicated transactions, and balances that should have been cleared.

Strengthen controls and documentation

Document how the business recognizes revenue, calculates estimates, reverses accruals, and approves period-end adjustments. Where possible, separate responsibility for approving, recording, and reconciling transactions so one person does not control the full process.

Monitor cash flow alongside profit

Accrual reports can show revenue and profit before the cash arrives. Review overdue receivables, upcoming payments, and cash forecasts alongside the income statement and balance sheet so reported performance doesn’t hide a potential cash shortfall.

How can accounting software help with accrual accounting?

Accrual accounting becomes harder to manage as transaction volumes, contracts, and reporting requirements grow. Accounting software can take routine work off the finance team by tracking unpaid balances, managing revenue schedules, automating workflows, and highlighting the figures that need attention before month-end.

Sage Intacct can automate accounts payable and revenue recognition, including the use of templates and schedules to manage recognized and deferred revenue. Its reports and dashboards also give finance teams real-time visibility into financial performance and outstanding balances.

By centralizing financial data, accounting software can help finance teams spend less time chasing spreadsheets and more time reviewing performance, cash flow, and the decisions that move the business forward.

Frequently asked questions about accrual basis accounting

Is accrual accounting required by GAAP?

Yes. For financial statements to comply with US Generally Accepted Accounting Principles (GAAP), they are prepared using accrual basis accounting. Transactions are reflected in the periods in which they affect financial performance, even when the related cash moves in a different period.

Cash basis reports may be useful internally or for eligible tax reporting, but they are not GAAP-compliant.

Can a small business use accrual basis accounting?

Yes. A small business can use accrual basis accounting even when they are eligible to use the cash method for federal tax purposes. The accrual method can be particularly useful for businesses that sell on credit, carry inventory, manage subscriptions, or need to compare profitability across accounting periods.

Does accrual accounting show how much cash a business has?

Not from reported profit alone. Accrual-based financial statements still show the cash balance on the balance sheet and cash movement on the cash flow statement, but net income can differ from the cash currently available.

Businesses should therefore review cash flow and cash balances alongside accrual-based profit.

What is the difference between accrued expenses and accounts payable?

Accrued expenses are costs a business has incurred but has not yet received an invoice for. Accounts payable generally represents supplier invoices the business has received but not paid. Both are liabilities, but an accrued expense may still be based on an estimate until the invoice arrives.

Can a business use accrual accounting for its financial statements and cash accounting for taxes?

Yes, in some cases. A business may prepare accrual-based books or financial statements while using the cash method for federal tax reporting if it meets the relevant eligibility rules.

The IRS applies specific requirements based on factors including business structure, gross receipts, inventory, and tax-shelter status. Because using different methods creates differences between financial and tax records, businesses should confirm the appropriate treatment with a tax professional.

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