Accrual Basis Accounting: Seeing the Full Picture of Your Business

If you’re serious about understanding your business’s financial health, accrual basis accounting is where clarity starts. Unlike cash basis—where you only record money when it changes hands—accrual accounting records income when it’s earned and expenses when they’re incurred. That’s the key difference.

Here’s what that looks like in practice:

🔹 Revenue Recognition
You earn revenue the moment you deliver a product or service, not when the client pays. Even if the check comes later, your books reflect the work done. This gives you a truer picture of how your business is performing month-to-month.

🔹 Matching Expenses to Income
Expenses get recorded when they’re incurred, not just when you pay the bill. That means the cost of doing business lines up with the revenue it helped generate, giving you a more accurate profit picture.

🔹 Handling Deferred Revenue & Accounts Receivable
Say a client pays you in advance for a service you’ll deliver next month. Under accrual, that payment is recorded as deferred revenue (a liability) until you complete the work. Similarly, if you’ve delivered a service but haven’t been paid yet, that goes into accounts receivable—still showing as earned income.

🔹 Why It Matters
Accrual accounting is essential if you:

• Carry inventory

• Invoice clients regularly

• Seek financing or investors

• Want precise insights into profitability and cash flow

Cash basis works fine for simpler, service-based businesses, but if your operations are growing, accrual gives you the clarity to make informed decisions and spot trends before they become problems.

I hope this helps clarify some of the confusion that can come with accrual basis accounting. Feel free to reach out if you have any questions.

I’ll cover cash basis accounting in my next post.