Accrual Accounting

Definition

An accounting method that records revenue when earned and expenses when incurred — regardless of when cash changes hands. The opposite of cash-basis accounting, which records transactions only when money moves.

Why it matters

Cash-basis books mislead growing businesses because they ignore obligations already incurred and revenue already earned. A business may look profitable in cash terms while accumulating large unpaid bills, or look unprofitable while sitting on uninvoiced work. Accrual books reflect economic reality and are required for any business above ~$1M in revenue or with inventory.