What is accrual accounting, and why does it matter?
Most small business owners start out managing their books in their head, or on the cash method — recording income when cash actually arrives and expenses when they're actually paid. Accrual accounting works differently, and understanding the difference matters more than most owners expect.
The core idea
Accrual accounting records income when it's earned (e.g., when you deliver the product or complete the service) and expenses when they're incurred — regardless of when cash actually changes hands. This is often called the "matching principle": revenue and the expenses that generated it get recorded in the same period.
Why it matters
Cash accounting can make a business look more or less profitable than it actually is, just based on payment timing. A big invoice sent in December but paid in January will show up as January income under cash accounting — even if the work (and the cost of doing it) happened in December. Accrual accounting keeps your financials matched to when the business activity actually occurred, which makes month-to-month and year-to-year comparisons far more meaningful.
Who's required to use it
Larger businesses (generally those above certain average gross receipts thresholds, and most C Corps and businesses carrying inventory) are required to use the accrual method for tax purposes. Many smaller businesses can choose either method, and some run accrual books for management purposes while filing taxes on the cash method.
The tradeoff
Accrual accounting gives a more accurate picture of business performance, but it takes more bookkeeping discipline — tracking receivables, payables, and accruals that cash accounting simply ignores. For a growing business, that extra discipline is usually worth it.