BUSINESS MECHANICS
What Is Accrual Accounting?
Accrual accounting records revenue when it is earned and expenses when they are incurred—not only when cash changes hands.
Why It Matters
Most business confusion comes from mixing up “making money” with “cash in the bank.” Accrual is the ruleset that keeps those ideas separate so you can read an income statement honestly—and see why timing tools like deferred revenue exist.
Two clocks, one business
Cash timing
Money moves when customers pay and when you pay suppliers.
Accrual timing
Revenue and expenses line up with delivery, effort, and obligations.
Accrual does not say cash is unimportant. It says performance and liquidity are different questions—both worth answering.
What This Means
You can earn revenue before you collect cash (see accounts receivable), collect cash before you earn revenue (deferred revenue), or pay expenses after they hit the income statement. Accrual is the language that keeps the story coherent.
How Accrual Accounting Works
Under accrual rules, revenue recognition happens when control of a good or service transfers to the customer (based on the standard you are following), not necessarily when payment arrives.
Expenses follow the same idea: if you consume economic benefit this period, you record the expense this period—even if the cash payment is next month.
That is why profit and cash flow diverge in completely normal businesses. Accrual answers “how did we perform?” Cash answers “can we fund payroll?”
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Related Concepts
Frequently Asked Questions
- Is accrual accounting the same as when cash is paid?
- No. Accrual focuses on when revenue is earned and when expenses are incurred. Cash timing can be earlier or later.
- Why do public companies use accrual accounting?
- It makes results more comparable across periods by reducing noise from the exact day cash moves.
- Does accrual accounting ignore cash?
- No. Cash still matters. Accrual explains performance; the cash flow statement explains liquidity.
Understand how these concepts connect
Compound School is a structured system for understanding accounting, finance, and business mechanics from first principles.