# What is accrual accounting? > Accrual accounting records income and expenses when earned or incurred, not when cash moves. See how it differs from cash basis, with an example. Source: https://learn.ynteractive.com/content/glossary/accrual-accounting · Updated 2026-10-02 · Free from Stepthrough (https://learn.ynteractive.com) [Business](https://learn.ynteractive.com/content/glossary#topic-business) · [AI glossary](https://learn.ynteractive.com/content/glossary) Quick answer Accrual accounting records revenue when you earn it and expenses when you incur them, whether or not money has changed hands yet. Cash-basis accounting records both only when cash actually arrives or leaves. Most businesses of any size, and anyone with loans or inventory, end up on accrual. Last updated October 2, 2026 Updated October 2, 2026 · By [Robert Breen](https://learn.ynteractive.com/content/about) ## Why it matters for a small business Cash-basis books are easy to keep, but they can mislead. If a client pays a big invoice on January 2 for work you finished in December, a cash-basis report shows a weak December and a spectacular January. Accrual puts the income in December, next to the costs it took to earn it, so each month tells you what really happened. The choice also affects lenders, buyers and tax filings. Banks often ask for accrual statements, and the rules about who may use cash basis depend on your size and structure. That last part is a question for your CPA, not for a glossary. What a business owner can do is understand the idea well enough to ask good questions at the year-end meeting. ## In a real lesson: Turn a Client Meeting into Action Items and a Follow-Up Email (Accounting Firms) The [Summarize a Client Meeting lesson](https://learn.ynteractive.com/content/chatgpt-client-meeting-recap-accounting-firm) never uses the word accrual, but its made-up client shows why the idea matters. In the transcript, Cedar Lane Landscaping, a client of the made-up firm Millbrook Accounting, bought a truck on August 12 for thirty-eight thousand dollars and financed most of it through the bank. The bookkeeper, Maya, says it will be set up as equipment with a loan against it, not as an expense. On a pure cash basis, only the down payment and each loan payment would ever show up. Treating the truck as a purchase on the day it happened, with the loan recorded alongside it, is the kind of thinking accrual accounting asks for. The same transcript sets a goal of closing Q3 by October thirtieth, once the September statements arrive by the twentieth. The lesson's job is turning that conversation into decisions and an action items table. Whether the firm keeps this client on cash or accrual is not discussed, so treat the example as context, not as a ruling. [Try this lesson free](https://learn.ynteractive.com/modules/accounting-meeting-summary) or [read the step-by-step guide](https://learn.ynteractive.com/content/chatgpt-client-meeting-recap-accounting-firm). ## Common confusions ### Accrual vs cash basis Cash basis follows the bank account: a sale counts when the money lands. Accrual follows the commitment: a sale counts when you deliver, and a bill counts when you receive the benefit. You can have a profitable accrual month with an empty bank account. ### Accrual vs depreciation Both spread the effect of a transaction over time, but they answer different questions. Accrual is about when to record something. Depreciation spreads the cost of a long-lived item, like the truck, across the years you use it. The meeting leaves depreciation for the year-end planning session. ## Tips - Ask your bookkeeper which basis your reports use before you compare two months. A swing may be timing, not performance. - Keep a simple list of invoices you have sent but not been paid for. That list is half of what accrual needs. - Let your CPA choose or change the method. It can affect taxes and is not a setting to flip yourself. ## Related terms [Accounts receivable](https://learn.ynteractive.com/content/glossary/accounts-receivable) · [Closing the books](https://learn.ynteractive.com/content/glossary/closing-the-books) · [Chart of accounts](https://learn.ynteractive.com/content/glossary/chart-of-accounts) · [Fixed asset](https://learn.ynteractive.com/content/glossary/fixed-asset) · [Bank reconciliation](https://learn.ynteractive.com/content/glossary/bank-reconciliation) · [Deferred revenue](https://learn.ynteractive.com/content/glossary/deferred-revenue) ## More Business terms [Accrued expense](https://learn.ynteractive.com/content/glossary/accrued-expense) · [Action items](https://learn.ynteractive.com/content/glossary/action-items) · [Actual cash value (ACV)](https://learn.ynteractive.com/content/glossary/actual-cash-value) · [Ad copy](https://learn.ynteractive.com/content/glossary/ad-copy) ## Where you use it: free lessons - [Turn a Client Meeting into Action Items and a Follow-Up Email (Accounting Firms)](https://learn.ynteractive.com/content/chatgpt-client-meeting-recap-accounting-firm) (ChatGPT, 9 min) - [Build an AI Agent That Categorizes Business Expenses](https://learn.ynteractive.com/content/n8n-ai-agent-categorize-business-expenses-google-sheets) (n8n, 12 min) ## Frequently asked questions **Is accrual accounting better than cash basis?** Neither is better in every case. Cash basis is simpler and fine for many tiny businesses. Accrual gives a truer picture of performance. Your accountant can say which one fits your situation and your tax obligations. **Can AI keep accrual books for me?** AI can sort expenses and draft summaries, as the lessons show, but choosing and applying an accounting method is a professional judgment. Use AI to prepare, and have your accountant review. [All AI glossary terms, A to Z](https://learn.ynteractive.com/content/glossary) · [Free prompt templates](https://learn.ynteractive.com/content/prompts)