Accrual Accounting

Quick Definition

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

What is Accrual Accounting?

Accrual accounting records financial transactions when they occur economically, not when cash moves. Revenue is recognized when earned (even if not yet paid), and expenses are recorded when incurred (even if not yet paid).

Why Accrual Accounting Matters

For SaaS companies, accrual accounting is essential. When you sign an annual contract for $120K, you cannot recognize all that revenue immediately. You earned $10K this month and will earn the rest over the next 11 months. Accrual accounting captures this timing properly.

Investors and auditors require accrual-based financials because they give a more accurate picture of business performance than cash-based statements that can be manipulated by timing payments.

Accrual vs Cash Basis

Cash basis is simpler but less accurate. Accrual is more complex but shows true economic activity. Most startups beyond very early stage need accrual accounting.

Formula

• Revenue Recognition: Record when service is delivered, not when cash is received
• Expense Recognition: Record when benefit is received, not when cash is paid

Example

Your SaaS company in December:

• Signs $60K annual contract (customer pays in January)
• Receives hosting bill for December (due in January)

Under accrual accounting:

• Record $5K revenue in December ($60K ÷ 12 months)
• Record hosting expense in December when service was used

Cash has not moved, but your December financials accurately reflect December activity.

Related Terms

Cash Basis Accounting

An accounting method that records transactions only when cash is received or paid out.

Revenue Recognition

The accounting principle determining when revenue is recorded, based on when it's earned rather than when cash is received.

Accounts Receivable (AR)

Money owed to a company by customers who have received goods or services but haven't yet paid.

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