How accrual works
Under accrual accounting, a business records a sale the moment it delivers the product or service, even if the customer has not paid yet. The same applies to expenses: a cost is recorded when the business receives the benefit, such as a month of rent or a completed repair, regardless of when the invoice is paid. This holds true even for costs like a phone bill that arrives weeks after the service was actually used.
Accruals are typically recorded through adjusting entries at the end of a period, then reversed once the actual cash transaction happens. This method gives a more accurate picture of profitability than simply tracking cash in and cash out, which is why most lenders and investors expect financial statements prepared on an accrual basis. Small businesses sometimes use cash basis instead for simplicity, but accrual accounting is required under generally accepted accounting principles for larger companies.
Example
A consulting firm finishes a project on March 28 and bills the client $6,000, but the client does not pay until April 15. Under accrual accounting, the firm records $6,000 of revenue in March, the month the work was done. If it used cash basis instead, that $6,000 would show up in April, making March look less profitable than it really was.
Accrual in QuickBooks Online vs Xero
QuickBooks Online defaults new companies to accrual reporting but lets you toggle reports to cash basis under report settings. Xero works the same way, with a cash or accrual switch available on every financial report. Neither tool changes the underlying transactions, only how the report summarizes them. Choosing accrual reporting does not change how transactions are entered day to day, only how the resulting reports are presented.
Related terms
How LedgerBPO handles accrual
We record accruals and adjusting entries every month so your financial statements reflect what was actually earned and spent, not just what moved through the bank. A dedicated accountant reviews open invoices and unpaid bills before closing the books. You get accurate, accrual basis reports your lender or investor can rely on. We explain the difference clearly so you know why a report can look different depending on the basis selected.