Why it matters
Accrual accounting gives a more accurate picture of a business's profit and obligations than cash receipts alone. It is also required for some businesses and lenders, and it changes how the tax return is prepared.
Example
A consultant finishes a project in December, invoices the client in January and receives the cash in February. Under accrual accounting, the revenue belongs to December, and the unpaid invoice is an account receivable at year end.
Related terms
Questions about Accrual accounting
Can a small business use cash accounting instead?
Many small businesses can use the cash method, but the rules depend on the entity, the revenue and whether the business holds inventory. The tax preparer should confirm the method before the return is filed.