What is accrual accounting in simple terms?

Accrual accounting is a method where you record income when you earn it and expenses when you incur them—not when cash changes hands.

Example:

• You finish a $50,000 project in December but get paid in February. Under accrual accounting, the $50,000 shows up in December’s books.

This approach gives a truer picture of how your business is performing.

How is accrual accounting different from cash accounting?

• Cash accounting → Records revenue and expenses only when money moves in or out of your bank account.
• Accrual accounting → Records revenue when earned and expenses when incurred, regardless of payment timing.

Key takeaway: Cash accounting is simple but misleading. Accrual accounting aligns financial reports with actual business activity.

Who needs to use accrual accounting?

• Businesses with inventory or credit sales (required by IRS rules)
• Companies with average revenues over $25 million (IRS mandatory)
• Any business following GAAP standards

Even smaller businesses benefit, especially if:
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- You manage long-term projects
- You give customers credit terms
- You need investors or lenders to trust your numbers

What are accruals in accounting?

Accruals = financial activity recorded before cash moves.

Types include:

1. Accrued Expenses – Wages earned but not paid, utility bills for services already used
2. Accrued Revenue – Work completed but not yet billed
3. Prepaid Expenses – Rent or insurance paid upfront
4. Deferred Revenue – Customer payments received before you deliver service

Why does accrual accounting matter for decision-making?

Because it helps you avoid blind spots.

With accrual accounting, you get:

• Real-time visibility → Know what you’ve really earned and owe
• Better cash flow planning → See upcoming obligations and receivables
• More accurate profit measurement → Match revenues with related expenses
• Smarter growth planning → Spot profitability patterns for scaling decisions

What is the “matching principle” in accrual accounting?

The matching principle requires recording expenses in the same period as the revenues they helped create.

Example: Employee bonuses for 2025 revenue are recorded as 2025 expenses, even if paid in 2026.

This shows the true cost of earning revenue in the right period.

How does revenue recognition work?

You recognize revenue when you deliver value—not when you get paid.

Example:

• A SaaS company charging $12,000 annually records $1,000 each month, not $12,000 upfront.
• The balance is listed as deferred revenue (a liability).

This avoids overstating revenue in one period.

How do you record accruals in practice?

Accruals rely on double-entry bookkeeping:

• Accrued revenue → Debit Accounts Receivable, Credit Revenue
• Accrued expense → Debit Expense, Credit Accounts Payable

Modern accounting software automates this, but understanding the logic prevents errors.

What are the pros and cons of accrual accounting?

Pros

• Accurate financial picture
• Required for scaling businesses
• Trusted by investors, lenders, and regulators

Cons

• More complex than cash accounting
• Can show profits while your bank account is low → need strong cash flow management

Should small businesses use accrual accounting?

If you’re very small with simple cash-based operations, cash accounting may suffice.

But if you want:

• Funding
• Growth planning
• Investor confidence
  … then accrual accounting gives you the clarity you need to scale safely.

Final Word

Cash-only reporting makes your business look healthier (or weaker) than it really is. Accrual accounting gives you the real story—helping you make smarter decisions about hiring, investments, and growth.

At FinSouthern, we help founders implement accrual-based systems, track the right metrics, and keep cash flow under control.

👉 Book a free consultation at www.finsouthern.co

About FinSouthern

FinSouthern provides Fractional CFO, Controller, and Bookkeeping solutions that help businesses grow with clarity and control.

Disclaimer

The information provided in this article is for educational and informational purposes only and should not be considered accounting, tax, or legal advice. Every business has unique circumstances, and regulations may change. You should consult with a qualified accountant, tax advisor, or financial professional before making decisions based on the concepts discussed here. FinSouthern does not assume any liability for actions taken without professional guidance.

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