Accrual Accounting

What Is Accrual Accounting?

Accrual accounting is the standard accounting method used by most businesses, where transactions are recorded when they occur economically—not when cash changes hands. Under accrual accounting:

• Revenue is recorded when earned (goods delivered, services performed)
• Expenses are recorded when incurred (goods received, services consumed)

This matching of revenue and expenses in the same period provides a more accurate picture of profitability than tracking only cash movements.

Accrual vs. Cash Accounting

Aspect	Accrual Accounting	Cash Accounting
Revenue timing	When earned	When received
Expense timing	When incurred	When paid
Complexity	Higher	Lower
Accuracy	More accurate	Less accurate
Required for	Larger companies, GAAP	Small businesses only
Matching	Revenue matched to expenses	No matching

Example: Consulting Project

You complete a $10,000 consulting project in December. Client pays in January.

Cash Accounting:

• December: $0 revenue
• January: $10,000 revenue

Accrual Accounting:

• December: $10,000 revenue (when earned)
• January: $0 revenue (already recorded)

Accrual accounting shows the revenue in the period the work was performed.

Key Accrual Concepts

Accrued Revenue

Revenue earned but not yet billed or collected:

Debit:  Accrued Revenue (Asset)    $5,000
Credit: Service Revenue            $5,000

Example: Work completed in December, invoice sent in January.

Accrued Expenses

Expenses incurred but not yet paid:

Debit:  Salary Expense             $50,000
Credit: Accrued Salaries (Liability) $50,000

Example: December salaries paid in January.

Deferred Revenue

Payment received before revenue is earned:

Debit:  Cash                       $12,000
Credit: Deferred Revenue (Liability) $12,000

Example: Annual subscription paid in advance.

Prepaid Expenses

Payment made before expense is incurred:

Debit:  Prepaid Insurance (Asset)  $6,000
Credit: Cash                       $6,000

Example: Six months of insurance paid upfront.

Why Accrual Accounting Matters

Accurate Profitability

Matching revenue with the expenses that generated it shows true profit:

• December project revenue matched with December labor costs
• Not distorted by timing of cash flows

Better Decision Making

Accrual-based financials support:

• Accurate trend analysis
• Meaningful period comparisons
• Valid profitability metrics

Required by Standards

GAAP and IFRS require accrual accounting for:

• Public companies
• Companies seeking investment
• Organizations above certain size thresholds

Bank and Investor Requirements

Lenders and investors expect accrual-based financials:

• Consistent with industry standards
• Comparable to other companies
• Reflects economic reality

Month-End Accruals

Common accruals recorded at period-end:

Accrued payroll: Wages earned but not yet paid Accrued interest: Interest incurred but not yet paid Accrued utilities: Services consumed but not yet billed Accrued revenue: Services performed but not yet invoiced Depreciation: Asset value consumed during the period Bad debt: Estimated uncollectible receivables

Accrual Accounting Challenges

Estimates required: Accruals often require judgment (bad debt, warranty reserves)

Timing complexity: Determining when revenue is earned or expenses incurred

Reversal management: Accruals must be reversed when actual amounts are known

Reconciliation: Accrual entries must be tracked and cleared

Cash flow disconnect: Profitable on paper but cash-poor is possible

How Go Fig Supports Accrual Accounting

Go Fig helps manage accrual processes:

Automated accruals: Generate recurring accrual entries based on rules

Reversal tracking: Ensure accruals are properly reversed

Period comparison: Compare accruals across periods to identify trends

Cash vs. accrual: Reconcile accrual-based results to cash flow

Accrual analysis: Surface accruals that may need adjustment

Audit support: Document accrual methodologies and calculations