Accrual accounting is a method of accounting that records revenue when it is earned and expenses when they are incurred, regardless of when cash is actually received or paid. A sale shipped in June is June revenue even if the customer pays in July. A freight bill for June deliveries is a June expense even if it arrives in August. The result is a profit and loss statement that matches each month’s income with the costs of earning it.
This guide explains how accrual accounting works day to day: the four kinds of accruals, the journal entries behind them, a worked month for an online brand, the IRS rules on who must use the method, and where accrual bookkeeping tends to slip. If you would rather hand the month-end work to a team, our bookkeeping services for small businesses run accrual books and close them every month.
Why accrual accounting exists at all
Most businesses do not operate on clean, cash-only timelines. Work is performed before invoices are issued. Stock is received before the supplier is paid. Employees earn wages every day, even if payroll runs twice a month. Marketplaces and payment processors hold funds for days before they settle to the bank.
If the books only reflected bank activity, reports would lag behind reality, sometimes by weeks. Accrual accounting closes that gap by recording activity when economic value is created or consumed, not when money moves. Without accruals, profit depends on payment timing, and payment timing is rarely consistent.
The two principles behind it
Accrual accounting rests on two ideas.
- Revenue recognition. Revenue is recorded when it is earned. Under the converged revenue standard that the FASB and IASB issued together in 2014 (ASC 606 in US GAAP, IFRS 15 internationally), that means when control of the goods or services passes to the customer, in the amount the business expects to be entitled to.
- Matching. Expenses are recorded in the period they help produce revenue, or the period in which they are used up. Cost of goods sold lands in the month the product sells, not the month the inventory was bought.
For tax, the IRS puts it in its own words in Publication 538: under an accrual method you generally report income in the year you earn it and deduct expenses in the year you incur them, regardless of when payment is received or made. Income is earned when all events have occurred that fix your right to receive it and the amount can be determined with reasonable accuracy. An expense is deductible when the liability is fixed, the amount is determinable and economic performance has occurred.
What accrual accounting actually captures
Accrual accounting answers one question: what happened during this period? Not what was paid and not what was collected, but what actually occurred. In practice that means four kinds of adjustment, often simply called accruals and deferrals.
| Type | What it is | Cash timing | Balance sheet account | DTC example |
|---|---|---|---|---|
| Accrued revenue | Earned but not yet billed or collected | Cash comes later | Asset (accrued or unbilled receivable) | Wholesale order shipped June 28, invoiced July 3 |
| Accrued expense | Incurred but not yet billed or paid | Cash goes later | Liability (accrued expenses) | June 3PL storage and pick fees billed mid-July |
| Deferred revenue | Collected but not yet earned | Cash came first | Liability (deferred revenue) | Preorders and gift card sales |
| Prepaid expense | Paid but not yet used | Cash went first | Asset (prepaid expenses) | Annual software subscription paid in January |
Accrued revenue and accrued expenses record something that has happened before the paperwork. Deferred revenue and prepaid expenses hold back something that has been paid before it has happened. People mix up the last two with accruals because the cash moves in the opposite direction, which is why each needs its own account and its own schedule.
Accruals in accounting: the journal entries
Every accrual is an adjusting entry made at period end, usually reversed on the first day of the next period so the real invoice can be booked normally. These are the four entries in their simplest form.
Accrued revenue. The brand ships $12,000 of goods to a wholesale customer on June 28. The invoice goes out July 3.
| Date | Account | Debit | Credit |
|---|---|---|---|
| June 30 | Accrued receivable | $12,000 | |
| June 30 | Wholesale revenue | $12,000 |
Accrued expense. The warehouse bills June fulfillment fees of $8,400 on July 15.
| Date | Account | Debit | Credit |
|---|---|---|---|
| June 30 | Fulfillment expense | $8,400 | |
| June 30 | Accrued expenses | $8,400 |
Deferred revenue. Customers pay $20,000 for preorders in June that ship in August.
| Date | Account | Debit | Credit |
|---|---|---|---|
| June | Cash | $20,000 | |
| June | Deferred revenue | $20,000 | |
| August, on shipment | Deferred revenue | $20,000 | |
| August, on shipment | Sales revenue | $20,000 |
Prepaid expense. A $6,000 annual software plan is paid on January 1 and used evenly across the year.
| Date | Account | Debit | Credit |
|---|---|---|---|
| January 1 | Prepaid expenses | $6,000 | |
| January 1 | Cash | $6,000 | |
| Each month end | Software expense | $500 | |
| Each month end | Prepaid expenses | $500 |
Each entry has two sides that balance, which is why accrual accounting only works inside a double-entry bookkeeping system.
A worked month: one brand, two methods
Here is a simplified June for an online brand. It sold $150,000 of product that shipped in June, of which $135,000 settled to the bank in June and $15,000 settled in early July. It also received the $20,000 of preorders above. It paid $40,000 to a supplier for stock received in May, while the stock actually sold in June cost $55,000. June fulfillment of $8,400 is billed in July, and June ad spend of $30,000 was charged to a card and paid in June.
| Line | Cash basis, June | Accrual basis, June |
|---|---|---|
| Sales | $155,000 (June settlements plus preorders) | $150,000 (goods shipped in June) |
| Cost of goods sold | $40,000 (supplier payment) | $55,000 (cost of units sold) |
| Fulfillment | $0 | $8,400 |
| Advertising | $30,000 | $30,000 |
| Profit for June | $85,000 | $56,600 |
The cash view shows June as a far better month than it was. It counts preorders the business has not yet fulfilled, uses a supplier payment for May stock as if it were June’s cost of sales, and leaves out a fulfillment bill that is certainly coming. The accrual view says what June actually earned: $56,600 on $150,000 of sales. The bank balance is still important, and the cash flow statement shows it, but it answers a different question. For the method on the other side of this table, see our guide to cash basis accounting.
Who has to use accrual accounting
For financial statements. US GAAP and IFRS are both accrual frameworks. A business that needs GAAP statements for an audit, a lender, an investor or an acquirer will keep accrual books, even if it files its taxes on another method.
For taxes. The IRS rules are narrower than many owners assume. Per Publication 538, C corporations, partnerships with a C corporation as a partner, and tax shelters generally cannot use the cash method. The exception is the gross receipts test: an entity whose average annual gross receipts for the three prior tax years do not exceed the inflation-adjusted limit can still use cash. For tax years beginning in 2026 that limit is $32,000,000, set in Revenue Procedure 2025-32, section 4.30. An entity that fails the test must change to an accrual method for that year.
Inventory. Holding inventory no longer forces a small business onto accrual for tax the way it once did. Publication 538 lets a small business taxpayer that meets the same gross receipts test choose not to keep an inventory, and instead treat it as non-incidental materials and supplies or follow its treatment in its financial statements. Larger inventory businesses generally use accrual for purchases and sales.
Changing method. Moving between methods for tax is a change of accounting method, and it generally needs IRS consent through Form 3115. Plan it with your tax adviser before the year begins.
Accrual bookkeeping: what the monthly work looks like
Accrual bookkeeping is the routine that keeps these entries honest. In most growing businesses it follows the same cycle each month.
- Cut off. Agree the last day of the period and make sure shipments, receipts and bills are dated to the right side of it.
- Book the known bills. Enter every supplier bill received, matched to purchase orders and receiving records.
- Accrue the unbilled. List recurring costs that have not arrived yet (3PL fees, freight, agency retainers, utilities, payroll earned but unpaid) and accrue each one from a documented estimate.
- Defer the unearned. Move preorders, gift card sales and subscriptions paid in advance into deferred revenue, and release them as they are earned.
- Amortize prepaids. Run the prepaid schedule for insurance, software and annual contracts.
- Reconcile. Tie every balance sheet account, including clearing accounts for Shopify, Amazon, PayPal and Stripe, to a statement or a schedule.
- Reverse and true up. Reverse last month’s accruals on day one, then compare each accrual with the real invoice when it lands and adjust the estimate method if the gap is persistent.
Where accrual-based reporting commonly goes wrong
Accrual accounting rarely fails because the rules are misunderstood. It fails because execution becomes inconsistent over time. The common patterns:
- Accruals posted one month and forgotten the next, so an expense appears twice or not at all
- Revenue recognized on invoice date instead of shipment or delivery
- Accruals that are never reversed, which builds a stale liability on the balance sheet
- Estimates with no support, so nobody can explain a number during a review
- Adjustments tracked in a spreadsheet outside the accounting system
Individually these are minor. Over a year they compound, and leadership stops trusting the numbers, not because they are wildly wrong but because they are hard to explain.
Cash flow still matters under accrual accounting
Accrual accounting does not replace cash management. The income statement shows performance. The cash flow statement shows liquidity. A brand can post an accrual profit while its cash is tied up in inventory and marketplace receivables, and a profitable business can still run out of cash. Read the two together every month, and keep a rolling cash forecast alongside the accrual books.
How Atidiv helps businesses apply accrual accounting reliably
Our finance team keeps accrual books for growing businesses, including startups: the cut-off, the accrual and deferral schedules, the reconciliations and a documented month-end close with layered review, so the same method is applied the same way every month. When the books need to hold up for a lender, an investor or a year-end audit, that consistency is what they are judged on. Learn more about our bookkeeping services or contact us to talk it through.
Frequently asked questions
What is accrual accounting? What does accrual mean in accounting?
Accrual accounting is a method that records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. An accrual is the entry that records something that has happened before the invoice or payment, such as wages earned but not yet paid.
What are accruals in accounting?
Accruals are period-end adjusting entries for revenue earned but not yet billed (accrued revenue) and costs incurred but not yet billed (accrued expenses). Deferred revenue and prepaid expenses are their mirror images, where cash moves before the revenue is earned or the cost is used.
What is accrual bookkeeping?
Accrual bookkeeping is the day-to-day and month-end work of keeping books on the accrual method: booking bills and invoices, accruing unbilled costs, deferring unearned revenue, amortizing prepaids, reconciling every balance sheet account and reversing last month’s accruals.
Is accrual accounting mandatory for all businesses?
No. It is required for GAAP and IFRS financial statements. For taxes, C corporations and partnerships with a C corporation partner generally must use it unless they pass the gross receipts test, which for 2026 is average annual gross receipts of $32 million or less over the prior three years.
Does accrual accounting improve cash flow?
No. It improves visibility, not cash itself. It shows when profit and cash are drifting apart, which gives you time to act on receivables, inventory or spending.
Can accrual accounting be automated?
Partly. Accounting software can post recurring accruals, reverse them automatically and amortize prepaids from a schedule. Deciding what to accrue, estimating the amount and reviewing the result still needs a person.
What is the difference between an accrued expense and accounts payable?
Accounts payable is a bill you have received and not yet paid. An accrued expense is a cost you have incurred but not yet been billed for. When the bill arrives, the accrual is reversed and the bill is entered in accounts payable.
Maximilian Straub is the Chief Operating Officer for Guild Capital and oversees all areas of the company's strategic operations and portfolio performance across the world. He is also a board member for Atidiv, supporting its growth initiatives. He served as the Chief Operating Officer and Chief Financial Officer for Spring Place and had previously spent 7 years advising clients in strategy, operational execution and organizational transformation while at McKinsey & Company.