---
title: "Accrual basis"
description: "What the accrual basis of accounting is, how it differs from cash basis, why IFRS and US GAAP require it, and examples of accrued revenue and expenses."
canonical: https://ledgeriano.com/glossary/accrual-basis
language: en
publisher: "Ledgeriano"
updated: 2026-11-06
---

# Accrual basis

> What the accrual basis of accounting is, how it differs from cash basis, why IFRS and US GAAP require it, and examples of accrued revenue and expenses.

Under the accrual basis of accounting, revenue is recorded when it is earned and expenses when they are incurred, regardless of when cash is received or paid. Financial statements under IFRS and US GAAP are prepared on this basis, because it matches income with the costs of earning it in the same period.

Cash basis is simpler: record income when money arrives and costs when money leaves. It works for very small businesses but distorts results whenever customers pay late, suppliers give credit or costs are paid in advance. Accrual accounting fixes that with receivables, payables, prepayments and accruals.

The price is more judgement: estimating unbilled costs, deciding when a service is delivered, assessing bad debts. [Adjusting entries](https://ledgeriano.com/glossary/adjusting-entry) at each period end put those estimates into the books.

Because profit and cash diverge under accruals, always read the income statement together with the cash flow statement. The [cash conversion cycle calculator](https://ledgeriano.com/tools/cash-conversion-cycle-calculator) shows how long profit takes to turn into cash.

## Example: accrual vs cash basis

A consultancy delivers a 10,000 project in December and is paid in February. It also pays a 1,200 annual software subscription in December for the following year.

| Item | Cash basis: December | Accrual basis: December |
| --- | --- | --- |
| Project revenue | 0 | 10,000 |
| Software subscription | (1,200) | 0 (prepayment) |
| **Result** | **(1,200)** | **10,000** |

### Can a small business use cash basis?

In some countries, yes, for tax or simplified reporting below certain thresholds. Statements prepared under IFRS or US GAAP must use accruals.

### What is an accrued expense?

A cost incurred but not yet invoiced or paid at period end, such as wages earned in the last week of the month. It is recorded as an expense and a liability.