What is accrual accounting

Table of Contents

• Why Accrual Accounting Exists at All
• What Accrual Accounting Actually Captures
• Accrual Accounting Versus Cash Accounting in Practice
• Where Accrual-Based Reporting Commonly Goes Wrong
• Accrued Revenue: Recognizing Value Before Payment
• Accrued Expenses: Recording Obligations as They Arise
• Prepaid Expenses and Why They Create Confusion
• How Accrual Accounting Changes Financial Statements
• Accrual Accounting in Long-Cycle and Project-Based Businesses
• Cash Flow Still Matters (Even Under Accrual Accounting)
• Accounting Standards and the Role of Accruals
• Making Accrual Accounting Work at Scale
• How Atidiv Helps Businesses Apply Accrual Accounting Reliably in 2026
• FAQs

Accrual accounting is often described as a more “accurate” way to report financial performance, yet many businesses apply it inconsistently or mechanically. This article explains what is accrual accounting in day-to-day operations, where it commonly breaks down, and why execution matters more than theory as companies grow.

Why Accrual Accounting Exists at All

Most businesses do not operate in clean, cash-only timelines.

Work is performed before invoices are issued. Expenses are incurred before payments are processed. Even a consumer brand with 3+ employees quickly encounters timing gaps between work performed, expenses incurred, and when cash actually moves. Employees earn compensation daily, even if payroll runs twice a month. Vendors deliver services long before the final bill arrives.

If accounting only reflected bank activity, financial reports would lag behind reality, sometimes by weeks or months.

Accrual accounting exists to close that gap. So, what is accrual accounting?

Rather than waiting for money to move, accrual accounting records financial activity when economic value is created or consumed. That distinction may sound technical, but its implications are practical. Without accruals, profitability becomes timing-dependent, and timing is rarely consistent.

What Accrual Accounting Actually Captures

When people ask what is accrual accounting, they often expect a definition. But the definition alone does not explain why it matters.

Accrual accounting captures:

• Revenue that has been earned but not yet collected
• Expenses that have been incurred but not yet paid
• Obligations that exist regardless of cash timing

It answers a simple question: What happened during this period?

• Not what was paid.
• Not what was collected.
• But what actually occurred.

That distinction becomes more meaningful as transaction volume increases and operations become less linear.

Accrual Accounting Versus Cash Accounting in Practice

Cash accounting is straightforward. Money in, revenue recorded. Money out, expense recorded.

Accrual accounting is less visible, but more representative. Here’s what accrual accounting is and how it differs from cash accounting.

Cash accounting tells you where cash stands today. Accrual accounting tells you how the business performed during the period.

They answer different questions, and confusing the two leads to bad decisions.

At Atidiv, we often work with teams that conceptually understand accrual accounting but struggle to apply it consistently month after month. We help translate accrual principles into repeatable close processes that reflect real operational activity.

Where Accrual-Based Reporting Commonly Goes Wrong

Accrual accounting rarely fails because the rules are misunderstood. It fails because execution becomes inconsistent over time. These breakdowns tend to surface most clearly once a D2C company earning $5M+ revenue outgrows informal bookkeeping practices and begins operating across multiple sales channels.

Some common patterns include:

• Accruals posted one month and forgotten the next
• Revenue recognized based on invoice timing instead of delivery
• Expenses delayed to “smooth” results
• Adjustments tracked outside the accounting system

Individually, these issues seem minor. Over time, they compound.

Eventually, leadership stops trusting the numbers, not because they are wildly wrong, but because they are difficult to explain with confidence.

Accrued Revenue: Recognizing Value Before Payment

To truly understand what accrual accounting is, you must first know what accrued revenue and accrued expenses are.

Accrued revenue represents income earned before cash is received. This is common in service-based businesses, subscription models, utilities, and project-driven environments.

A consulting firm that delivers services throughout the month but invoices after month-end has already created value. Accrual accounting ensures that value is reflected in the correct reporting period.

Without accrued revenue:

• Monthly performance appears understated
• Margins fluctuate artificially
• Forecasts lose accuracy

Accrued revenue stabilizes reporting by anchoring income to delivery, not billing cycles.

Accrued Expenses: Recording Obligations as They Arise

Accrued expenses reflect costs incurred before payment. Payroll, professional services, interest, and utilities often fall into this category.

Ignoring accrued expenses inflates short-term profitability and understates liabilities. When payments eventually occur, results swing abruptly.

Common accrued expenses include:

• Salaries earned but unpaid
• Contractor services completed but not invoiced
• Interest accumulating between payment dates

Accruing these costs aligns expenses with the periods in which value was consumed.

We help businesses formalize how accruals are identified, supported, and reviewed. That structure reduces last-minute adjustments and creates consistency across reporting periods. Book a free consultation to learn more!

Prepaid Expenses and Why They Create Confusion

Prepaid expenses often get mixed up with accruals, even though they move in the opposite direction.

Prepaid expenses represent future benefits already paid for. Accrued expenses represent past benefits not yet paid.

Misclassifying these items distorts both profitability and working capital.

How Accrual Accounting Changes Financial Statements

Once you answer the question, “What is accrual accounting?”, you understand that it reshapes all three primary financial statements.

• Income statement: Revenue and expenses align with activity
• Balance sheet: Obligations and entitlements become visible
• Cash flow statement: Liquidity is separated from performance

This separation matters. A business can appear profitable while facing cash pressure. Accrual accounting makes that distinction clearer, not more confusing.

Accrual Accounting in Long-Cycle and Project-Based Businesses

Industries with extended delivery timelines, such as construction, manufacturing, SaaS, and professional services, benefit most from accrual accounting.

Cash accounting performs poorly in these environments. It shows losses during build phases and sudden gains at payment milestones. The complexity increases further for a D2C brand operating multiple regions like the UK, the US, and Australia, where delivery timelines, tax treatment, and reporting expectations rarely align perfectly.

Accrual accounting allows revenue and costs to be recognized progressively, providing a steadier view of performance.

This is why lenders and investors expect accrual-based reporting in complex businesses.

Atidiv supports accrual-based reporting for businesses with longer operating cycles. We help align project progress, delivery milestones, and accounting treatment so financials reflect actual performance.

Cash Flow Still Matters (Even Under Accrual Accounting)

Accrual accounting does not replace cash management. Instead, it complements it.

Accrual reports show performance. Cash flow statements show liquidity. Problems arise when one is interpreted without the other.

A profitable business can still run out of cash. Accrual accounting makes that risk visible sooner, not later.

Accounting Standards and the Role of Accruals

Both U.S. GAAP and IFRS are built on accrual principles. Public companies and larger private businesses are required to use accrual accounting because it promotes consistency and comparability.

Standards require accruals for:

• Revenue recognition
• Employee benefits
• Interest and lease obligations

Cash accounting is permitted only in limited cases and does not meet external reporting expectations at scale.

Making Accrual Accounting Work at Scale

The challenge is not learning what accrual accounting is. The challenge is sustaining it as volume and complexity increase. For a VP, Director, or senior manager of a growing D2C company, inconsistent accrual execution often becomes visible when financial reports stop supporting confident operational decisions.

That requires:

• Clear accrual policies
• Consistent cut-off rules
• Documented review steps
• Reduced reliance on tribal knowledge

Without structure, accrual accounting becomes fragile and personality-dependent.

How Atidiv Helps Businesses Apply Accrual Accounting Reliably in 2026

Finally, after understanding what accrual accounting is, you realize that it delivers value only when applied consistently and reviewed with discipline. Without that foundation, adjustments accumulate, and confidence erodes.

At Atidiv, we work with finance teams to strengthen accrual execution through defined close timelines, standardized documentation, and layered review. Our focus is operational reliability, not theoretical perfection.

When accrual accounting is applied consistently, finance teams spend less time correcting prior periods and more time supporting forward-looking decisions. That shift is what turns accounting accuracy into insight.

Partner with us to ensure your accrual accounting is not just compliant, but consistently reliable, so your financial reporting supports confident decisions as your business continues to scale.

What is Accrual Accounting FAQs

• Is accrual accounting mandatory for all businesses?

No. Accrual accounting is not mandatory for every business, but it is required for GAAP and IFRS reporting.

• Does accrual accounting improve cash flow?

Accrual accounting improves visibility, not cash itself.

• Why do accruals create confusion?

Inconsistency and a lack of documentation are the main reasons for accruals causing confusion.

• Can accrual accounting be automated?

Accrual accounting can be automated partially, but judgment and review remain essential.

• Is accrual accounting better for decision-making?

Yes, accrual accounting is ideal for decision-making when it is applied consistently.