Accrual Accounting

An accounting method that records revenue and expenses when they are earned or incurred, regardless of when cash actually changes hands.

Accrual accounting gives a more accurate picture of business performance than cash accounting. It prevents inflated profit figures from large upfront payments and reveals the true timing of obligations and income.

A founder signs a £12,000 annual software contract in January but receives payment in March. Under accrual accounting, she records £1,000 of revenue each month from January, rather than £12,000 in March when cash arrives.