What is Accrual Basis Accounting?

Accrual basis accounting records revenue when you earn it and expenses when you incur them, not when cash moves. That’s the ninth definition in the startup dictionary, and it’s how grown-up books are kept.

How does accrual basis accounting work?

Sign a $12,000 annual contract in January and accrual accounting books $1,000 of revenue each month as you deliver. Cash accounting would book all $12,000 the day the money lands. Same dollars, very different picture.

Why does accrual basis matter?

Accrual shows whether the business actually works. It matches revenue to the cost of earning it, which is why investors, auditors, and GAAP expect it. Cash-basis books can look great right up until the refunds hit.

Where did accrual accounting come from?

Double-entry bookkeeping dates to 15th-century Venice and a monk named Luca Pacioli. Modern accrual rules come from GAAP, the standards shaped after the 1929 crash to keep company books honest.

How do you use accrual basis well?

Startups often start cash-basis for simplicity, then switch as revenue grows. If you sell subscriptions or annual contracts, switch early. And track cash separately anyway, because accrual profits don’t pay payroll.

Bottom line: accrual tells you if the business works. Cash tells you if it survives the month. You need both.

For more startup terminology, visit startupdefinitions.com.