---
title: "What is accrual basis accounting?"
description: "Accrual Basis Accounting explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/accrual-basis-accounting/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is accrual basis accounting?

Glossary

Accrual basis accounting is a method of recording income when it is earned and expenses when they are incurred, regardless of when cash actually changes hands between the business and its customers or vendors.

Updated September 2026

## How accrual basis accounting works

Under accrual accounting, a sale is recorded as revenue when the product ships or the service is delivered, even if the customer has not paid yet, and a bill is recorded as an expense when it is received, even if it will be paid later on. This requires accounts receivable and accounts payable to track exactly what is owed in each direction at any given time.

Because it matches income and expenses to the period they actually relate to, accrual accounting gives a far more accurate picture of profitability than cash basis, which is why most lenders, investors and larger businesses require it outright. It does mean the books need more ongoing adjustment, accruals, deferrals and reconciliations, to stay accurate period after period.

## Example

A consultant delivers a project in December and invoices the client $6,000, but the client does not actually pay until January of the following year. Under accrual accounting, the $6,000 is recorded as December revenue, matching when the work was actually done, with the unpaid amount sitting in accounts receivable until payment finally arrives in January.

## Accrual Basis Accounting in QuickBooks Online vs Xero

QuickBooks Online defaults new companies to accrual basis reporting but allows toggling reports to cash basis whenever needed for a specific purpose. Xero works the same way, recording transactions on an accrual basis while letting reports be viewed on either basis depending on the situation.

## Common mistakes

- Accrued expenses are forgotten at period end because no bill has arrived yet, understating expenses and overstating profit for that period until the bill shows up later.
- Revenue is recognized when an invoice is sent rather than when the product actually shipped or the service was genuinely delivered to the customer.
- Accounts receivable is not reviewed alongside accrual-based revenue, so a business feels profitable on paper while customer payments are actually falling behind.

## Why it matters

Accrual accounting is what most lenders, investors and larger businesses require because it matches income and expenses to when they actually happened, not when cash moved. Getting accruals wrong, forgetting an expense or recognizing revenue too early, misstates profit in ways that can mislead an owner or a lender relying on those numbers. For growing businesses, disciplined accrual accounting gives a far more honest picture of true performance each period.

## Related terms

- [Cash Basis Accounting](https://ledgerbpo.com/glossary/cash-basis-accounting/)
- [Journal Entry](https://ledgerbpo.com/glossary/journal-entry/)
- [Financial Statements](https://ledgerbpo.com/glossary/financial-statements/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles accrual basis accounting

We maintain accrual basis books with accurate accruals, deferrals and reconciliations each period, giving you financial statements that reflect actual business performance rather than just the timing of cash moving in and out.

[Bookkeeping done every week, not every quarter](https://ledgerbpo.com/services/bookkeeping/)

Next step

## Books closed. Invoices paid. Every month.

Tell us what is going on with your books or billing. You will hear from a named person within 1 business day, with a custom quote and a plan for the first close.

- Reply from a named person within 1 business day
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Source: https://ledgerbpo.com/glossary/accrual-basis-accounting/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt