accrual basis
An accounting method recording revenues when earned and expenses when incurred, regardless of when cash is actually received or paid.
Example
“Under accrual basis accounting, the December sale was recorded as December revenue even though payment arrived in January.”
Memory Tip
ACCRUAL basis = record when EARNED, not when received. The standard for most businesses.
Why It Matters
Understanding accrual basis helps you see the true financial picture of a business or your personal finances, not just cash flow. This matters because a company can appear profitable on cash basis while actually losing money on accrual basis, or vice versa, affecting investment and lending decisions.
Common Misconception
Many people think accrual basis and cash basis are the same thing, assuming that recording money means you have received or spent it. In reality, accrual basis records transactions when they are legally obligated, which can be weeks or months before actual cash changes hands.
In Practice
A freelancer completes a project worth five thousand dollars in December but does not receive payment until February. Under accrual basis, they record the five thousand dollar revenue in December when the work is done, affecting their yearly income and tax obligations for that year, even though the actual cash arrives later.
Etymology
ACCRUAL (accumulation over time) BASIS (foundation method). ACCOUNTING on an ACCRUAL (earning/incurring) BASIS.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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