Accrual accounting

Recording revenue when it is earned and costs when they are incurred, regardless of when the money moves.

Example

You deliver the work in March and record March revenue, even though the cash arrives in May.

Important

It shows performance honestly and it is what investors expect. It also means your P&L can look healthy while the bank account empties — so accrual books must always be read next to a cash view.

Related terms

• Cash accounting — Recording revenue when money arrives and costs when money leaves.
• Cash flow — The actual movement of money in and out of your bank account, as distinct from revenue you have earned but not been paid.
• Income statement (P&L) — A statement of revenue, costs and profit over a period. Revenue − COGS = gross profit; gross profit − OpEx = operating profit.
• Deferred revenue — Money received for a service you have not yet delivered. It sits in your bank account and is a liability, not revenue, until the service is provided.

Lessons that explain it

• Cash or accrual — the choice that changes every number — The same month can be your best or your worst depending on which basis you use. What each one shows, and why you need to be able to read both. (12 min)

All 176 terms in the Founder glossary