What is accrual accounting?

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Accrual accounting is the method of recording financial transactions when they occur economically — when revenue is earned or an expense is incurred — rather than when cash is received or paid. It is the standard accounting basis for all businesses of meaningful size and is required under both IFRS and GAAP.

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Under accrual accounting, a sale is recognised in the period the goods or services are delivered, regardless of when the customer pays. An expense is recognised in the period it is incurred, regardless of when the supplier is paid.

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Why accrual accounting matters

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Accrual accounting produces a more accurate picture of a business's financial performance in a given period than cash accounting does. If a business delivers services in December but collects payment in January, cash accounting would show no revenue in December. Accrual accounting correctly attributes the revenue to December — the period in which it was earned.

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This matters for management decisions, investor reporting, covenant compliance, and tax calculations.

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How accruals work at period end

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At month-end, finance teams identify transactions that have occurred economically but are not yet in the system. Common accruals include: payroll for days worked but not yet paid, utility bills received but not yet processed, interest accrued on loans, services received but not yet invoiced by the supplier, and revenue earned but not yet invoiced to the customer.

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Each accrual is posted as a journal entry. Most are set up as reversing entries — they are automatically reversed at the start of the next period when the actual invoice or payment arrives.

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Related: Journal entry · Financial close · Month-end close · Revenue recognition