Glossary · Bookkeeping basics
Accrual basis
Accrual basis is an accounting method that records income when it is earned and expenses when they are incurred, whatever the date cash changes hands. An invoice counts as income on its date, and a vendor bill counts as an expense on its date, even if payment comes weeks later.
Glossary / Accrual basis · Also called accrual accounting, accrual method
How it works
Accrual accounting matches income with the costs of earning it in the same period, so the profit and loss shows how the business actually performed that month. It needs accounts receivable and accounts payable to hold amounts that are earned or owed but not yet paid.
Most accountants prefer accrual for anything but the smallest businesses, and lenders usually want accrual statements. The trade-off is that a profitable month on paper can still be short of cash, because customers have not paid yet.
Worked example: The same month, two methods
In March a consultant invoices $8,000 and receives a $600 software bill. By March 31, clients have paid $3,000 and the software bill is still unpaid.
On the accrual basis, March income is $8,000 and expenses are $600, for a profit of $7,400. On the cash basis, March shows $3,000 of income and no expense, for $3,000. Over the year both methods reach the same total once everything is paid; they differ in timing.
| March | Accrual | Cash |
|---|---|---|
| Income | $8,000 | $3,000 |
| Expenses | $600 | $0 |
| Profit | $7,400 | $3,000 |
In the US and in Canada
In the United States
The IRS lets many small businesses choose cash or accrual. Corporations and partnerships with a C corporation partner generally must use accrual once their average annual gross receipts pass the threshold in Internal Revenue Code section 448(c), which is indexed for inflation each year; businesses that keep inventory have their own rules. Ask your tax preparer which applies.
In Canada
In Canada, business income for tax purposes is generally calculated on the accrual basis. Farmers and fishers may use the cash method, and some self-employed commission sales agents have special rules. Your books can still show either view for management.
In AcboBooks
The Profit & Loss report runs on either basis: choose accrual or cash when you run it. The transactions are the same; only the report's timing changes.
Related terms
- Cash basis
- Accounts receivable (A/R)
- Accounts payable (A/P)
- Deferred revenue
- Accrued expense
- Profit and loss statement (P&L)
Related on this site
Sources
Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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