Accruals & Timing
Accrual Accounting
An accounting method that records revenue when earned and expenses when incurred, regardless of when cash moves.
Accrual accounting matches economic activity to the period it actually happened in, not the period money changed hands. You record revenue when you deliver the good or service, and you record an expense when you incur it — even if the customer hasn't paid you or you haven't sent the bill yet. The timing of cash is tracked separately as a balance sheet event.
This is the standard under GAAP and what investors, auditors, and lenders expect from any company with more than trivial complexity. It produces financial statements that reflect the real economics of a month: what you actually sold, what you actually spent, what you actually owe. The tradeoff is that accrual accounting requires judgment calls at period-end — estimates for bad debt, deferred revenue recalculations, accruals for uninvoiced costs — which is why the month-end close exists.
Example
A SaaS startup closes a $12,000 annual contract on January 1 and collects the cash immediately. Under accrual accounting, January books $1,000 of revenue and carry $11,000 as a deferred revenue liability. The other $11,000 gets recognized over the next eleven months as the service is delivered.
Common questions
What is the difference between accrual and cash basis accounting?
Accrual accounting records revenue when earned and expenses when incurred. Cash basis records both only when money moves. Accrual is required under GAAP and shows the true economics of a period; cash basis is simpler but can make a profitable month look disastrous if a big customer pays late.
Why do founders find accrual accounting confusing?
Because the bank balance and the P&L stop telling the same story. A month can show strong revenue while cash drops (you invoiced but weren't paid), or show a loss while cash rises (a customer paid for next year's service up front). Both are normal under accrual accounting.
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