What it means
Accrual basis is a rule about timing. A sale is recorded in the month you earn it, meaning the month you deliver the product or do the work. A cost is recorded in the month you incur it, meaning the month you use the thing or someone works for you.
The day money moves through the bank is still tracked. It just doesn't decide which month the revenue or cost belongs to. The alternative, cash basis, records everything when cash comes in or goes out. It's simpler and matches the bank, which is why many companies start there.
When the cash and the earning fall in different months, a balance-sheet account holds the difference until they line up. Pay before you use something and you have a prepaid, an asset. Use something before you pay and you have an accrued expense or a payable, a liability. Bill a customer before you deliver and you have deferred revenue.
At each month end, the close books the entries that move those balances. The P&L then shows the month's actual revenue and costs, while the balance sheet carries the timing differences.
Acme's designer works all of December and sends a $4,000 invoice on January 5. On a cash basis, December shows no design cost and January carries $4,000 for work done the month before. On an accrual basis, Acme records the $4,000 as a December expense, with a matching liability called accrued expenses.
In January the invoice arrives and Acme pays it. The payment clears the liability instead of hitting expense again, so the cost is counted once, in December. The year-end balance sheet also shows the $4,000 Acme owed on December 31.
US GAAP requires accrual accounting, so it's what investors, lenders and auditors expect. Prepaids, deferred revenue and ASC 606 are all the same timing rule applied to particular kinds of transaction.
Why it matters. On a cash basis, January looks terrible when you prepay a year of software and great when a customer pays annually. Accrual books show the business you actually ran that month.
Try it with your numbers
Change any number. The working below updates as you type.
Cash basis: expense when paid · Accrual basis: Amount ÷ Months, each month it's usedAccrual expense each month
$1,000.00
How it’s worked out
- 1Cash basis, Jan 2026All of it, when paid$12,000.00
- 2Cash basis, every later monthNothing paid, nothing booked$0.00
- 3Accrual basis, each month$12,000.00 ÷ 12$1,000.00
- 4Both bases over the full term$12,000.00 = $12,000.00$12,000.00
| Month | Cash basis | Accrual basis | Prepaid (accrual) |
|---|---|---|---|
| Jan 2026 | $12,000.00 | $1,000.00 | $11,000.00 |
| Feb 2026 | $0.00 | $1,000.00 | $10,000.00 |
| Mar 2026 | $0.00 | $1,000.00 | $9,000.00 |
| Apr 2026 | $0.00 | $1,000.00 | $8,000.00 |
| May 2026 | $0.00 | $1,000.00 | $7,000.00 |
| Jun 2026 | $0.00 | $1,000.00 | $6,000.00 |
| Jul 2026 | $0.00 | $1,000.00 | $5,000.00 |
| Aug 2026 | $0.00 | $1,000.00 | $4,000.00 |
| Sep 2026 | $0.00 | $1,000.00 | $3,000.00 |
| Oct 2026 | $0.00 | $1,000.00 | $2,000.00 |
| Nov 2026 | $0.00 | $1,000.00 | $1,000.00 |
| Dec 2026 | $0.00 | $1,000.00 | $0.00 |
Same total, different months. Accrual puts the cost in the months that use it.
The entry, worked
Acme's designer works through December and invoices $4,000 on January 5, which Acme pays in January. Closing December, Acme accrues the cost.
| Account | Debit | Credit |
|---|---|---|
| Contractor expense | $4,000.00 | |
| Accrued expenses | $4,000.00 | |
| Total | $4,000.00 | $4,000.00 |
December carries the cost of December's work, and the year-end balance sheet shows the $4,000 Acme owes.
Common questions
Can I switch from cash basis to accrual basis later?
Yes, but every open receivable, payable, prepaid and deferred revenue balance has to be rebuilt as of the switch date. The longer you wait, the more history there is to rebuild.
Can I keep accrual books and still file taxes on a cash basis?
Often, yes. Book and tax methods can differ. A C corporation can use the cash method for tax only while its average annual gross receipts over the prior three years stay under an inflation-adjusted limit, $32 million for 2026. Your preparer starts from the accrual books and adjusts.
Is an accrued expense the same as accounts payable?
Both are liabilities for costs already incurred. A payable is a bill you've received and entered. An accrued expense is a cost you've incurred but not yet been billed for, estimated at month end and cleared when the bill arrives.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- Accrual basisRecognizing revenue when earned and expense when incurred, regardless of when cash movesGlossary
- Why startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.Guide · 4 min
- Audit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.Guide · 4 min
- US GAAP for early-stage startups, in plain EnglishAccrual accounting, revenue recognition (ASC 606), leases (ASC 842), stock compensation and capitalized software: what each means for a small company.Guide · 4 min
- Form 1120: what to give your tax preparer, and whenWhat a startup hands its tax preparer for Form 1120: closed books, a balance sheet that ties to Schedule L, book-to-tax items, ownership and 1099s.Guide · 5 min
- How to read an income statement (P&L)Revenue, cost of revenue, gross margin, operating expenses and net income, read line by line, on accrual basis, with the mistakes founders make most.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- Cash vs accrual accounting for startups, and the IRS ruleCash or accrual for a startup: why investors and auditors read accrual, when the IRS lets a C-corp file on cash, and the 2026 gross receipts limit.Guide · 5 min
- Employee expense reimbursements and accountable plansHow to reimburse employees tax-free under an IRS accountable plan: business purpose, timely receipts, excess returned, mileage and sales tax on receipts.Guide · 6 min
- Accrued expenses vs accounts payable: the differenceAP is a bill you’ve received; an accrued expense is a cost incurred before the bill arrives. When to accrue, and how reversing entries work, by example.Guide · 5 min
- Bad debt and write-offs: allowance vs direct methodHow to book a customer who won’t pay: the GAAP allowance under ASC 326, the direct write-off the IRS requires, and what to do if the money comes back.Guide · 7 min
- Cash, accrual and cut-offCash accounting records when money moves. Accrual records when value moves. Every hard question in the rest of the course lives in the gap between the two.Lesson 8
- Why the books existBookkeeping is not record-keeping for its own sake. It is a system built so that an error announces itself and every figure traces back to an event.Lesson 1
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.