Accrual accounting matches income and expenses to the time periods when they actually occur, not when payment happens. You record income when you complete work and send an invoice, even if the client hasn't paid yet. You record expenses when they're incurred, even if you haven't paid the bill yet.
This method provides a more accurate picture of business performance by showing what you've truly earned and spent in each period. However, it can be misleading for cash flow since recorded income might not be collected for weeks or months after it's recorded as earned.
Example
You complete a $5,000 project in December and send an invoice. With accrual accounting, you record the $5,000 as December income even if the client doesn't pay until February.
Why It Matters for Freelancers
Accrual accounting gives a clearer picture of business performance over time and is required for larger businesses, but it can mask cash flow problems if not monitored carefully.
Related Terms
Cash Flow
The movement of money in and out of your business over time, measuring when you receive payments versus when you pay expenses.
Accounts Receivable
Money owed to your business by clients for work completed but not yet paid.
Invoice
A document sent by a business to a client that lists goods or services provided and the amount due for payment.
Accrual Accounting FAQs
Should small businesses use accrual accounting?
Many small businesses use cash accounting for simplicity, but accrual provides better business performance insights.
What's the difference from cash accounting?
Cash accounting only records transactions when money actually moves. Accrual accounting records them when earned/incurred regardless of payment timing.
Does accrual accounting affect taxes?
Yes — with accrual accounting, you may owe taxes on income you've invoiced but haven't collected yet. Consult a tax professional.
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