Accrual Basis
Accrual basis accounting records revenue when it's earned and expenses when they're incurred — regardless of when cash actually changes hands. It's the opposite of cash basis, where you only record transactions when money moves. Most businesses over $25 million in revenue are required to use accrual
Accrual Basis Definition
Accrual basis accounting records revenue when it's earned and expenses when they're incurred — regardless of when cash actually changes hands. It's the opposite of cash basis, where you only record transactions when money moves. Most businesses over $25 million in revenue are required to use accrual basis, but many smaller businesses choose it for a more accurate financial picture.
Accrual Basis in Practice — Example
You own a small marketing agency. In March, you complete a $10,000 project for a client and invoice them Net 30. You also receive a $3,000 bill from a subcontractor for design work done in March. Under accrual basis, you record the $10,000 as March revenue and the $3,000 as a March expense — even though your client doesn't pay until April and you don't pay the subcontractor until April either. Your March P&L shows the real economic activity of that month.
Why Accrual Basis Matters for Your Books
Accrual basis gives you a much more accurate picture of your business's financial health at any point in time. With cash basis, a great month could look terrible because your clients haven't paid yet, or a bad month could look great because old receivables finally came in. Accrual smooths that out and ties revenue to the period it was earned.
This matters enormously for decision-making. If you're evaluating whether to hire, buy equipment, or take on a new project, you need to know your true profitability — not just your cash position. Accrual basis tells you if the work you're doing is actually generating profit, separate from timing.
The downside? Complexity. Accrual basis requires tracking receivables, payables, prepaid expenses, deferred revenue, and more. It's more work for your bookkeeper, but the payoff is financial statements that banks, investors, and the IRS take seriously.
How Accrual Basis Shows Up in QuickBooks
In QBO, set your accounting method under Settings → Advanced → Accounting. QBO supports both accrual and cash basis, and you can toggle reports between the two. However, your day-to-day transaction entry (invoices, bills, journal entries) should follow your chosen method consistently. The Profit and Loss report lets you switch between accrual and cash basis views using the dropdown at the top.
Common Mistakes
FAQ
Q: Which is better — cash basis or accrual basis? A: It depends on your business size and complexity. Cash basis is simpler and works well for small service businesses. Accrual basis is more accurate and often required for businesses with inventory, investors, or revenue over $25M.
Q: Can I switch from cash to accrual basis? A: Yes, but it requires IRS Form 3115 (Change in Accounting Method) and can be complex. Talk to your CPA before making the switch.
Related Terms
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Related Terms
Break-even is the point where your business's total revenue equals its total costs — you're not making a profit, but you're not losing money either. It's the minimum amount of sales you need to cover all your fixed and variable expenses. Anything above break-even is profit; anything below is a loss.
Current liabilities are debts and obligations your business must pay within one year or the normal operating cycle, whichever is longer. They include accounts payable, short-term loans, accrued expenses, customer deposits, and current portions of long-term debt. Current liabilities appear on your ba
Interest income is money your business earns from interest-bearing accounts or investments — savings accounts, CDs, money market funds, or loans you've made to others.
Inventory is the stock of goods a business holds for sale to customers or for use in producing goods for sale. It includes raw materials, work-in-progress, and finished goods. Inventory is classified as a current asset on the Balance Sheet because it's expected to be sold or used within one year.
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