What Is Accrual Accounting?
Accrual accounting is a method that records revenue and expenses when they are earned or incurred, regardless of when cash actually changes hands. It's the standard required under US GAAP for most businesses because it matches income to the period that produced it, giving a more accurate picture of performance than cash accounting.
What accrual accounting is and why it matters
Under accrual accounting, you recognize revenue when it's earned (the work is done or goods delivered) and expenses when they're incurred (the cost is used), even if payment happens later. This "matching principle" ties costs to the revenue they help generate, so a month's income statement reflects that month's real activity rather than the timing of deposits and payments. It's the opposite of cash-basis accounting, which records transactions only when money moves. Accrual is required for companies that carry inventory, exceed certain revenue thresholds, or report under GAAP — which is why it underpins nearly all firm-managed books.
A worked example
A landscaping company completes a $6,000 job in June but the client pays in July. Under accrual accounting, the company records $6,000 of revenue in June — when it was earned — not July. Likewise, if it received a $900 utility bill in June for June usage but pays it in July, it records the $900 expense in June. June's income statement therefore shows both the revenue and the cost that belong to June, regardless of the actual cash dates.
How firms handle it today
Firms convert cash-basis books to accrual through adjusting journal entries at close — recording accruals, deferrals, and prepaids so each period is stated correctly. This is detailed, judgment-light work that recurs every month.
How OCTA Flow relates to accrual accounting
OCTA Flow can execute recurring accrual and deferral entries as part of the close procedure, proposing the standard adjustments each period and logging them to the audit trail for your team to review and approve.
Related terms
- Accrued expense
- Deferred revenue
- Journal entry
- Cash flow
- GAAP
FAQ
What's the difference between accrual and cash accounting?
Accrual records revenue and expenses when earned or incurred; cash accounting records them only when money is received or paid.
Is accrual accounting required?
US GAAP requires it for most businesses, especially those with inventory or above IRS revenue thresholds. Small businesses may qualify for cash basis.
Why do firms prefer accrual accounting?
It matches income and costs to the correct period, producing financial statements that reflect true performance rather than payment timing.
See how firms automate accrual entries at close → start an OCTA Flow trial.