Uploaded May 2022 | Updated September 2026, 3 weeks ago
A basic introduction to accrual vs cash accounting for casuals.
Today our topic is something that a lot of people think is scary - accrual accounting principles. It can have a lot of complexity, but the basic idea is pretty simple. Understanding accrual principles is valuable for anyone who wants to run a business. Today I’m going to try to give you a general intro to the topic, and will explain how it relates to two other terms you have have heard: Accounts Payable, and Accounts Receivable, or AP and AR.
Most of us live our daily lives thinking about our money on a cash basis. When someone asks you “How much money did you spend this month,” the way many of us would do it would be to look at our bank statements for last month and this month, add up all the payments we made, and give that as an answer.
But that answer may not be accurate, especially if we want to know how much we’ve spent in a certain period. The question about what exactly does “spend” mean is trickier than you might think. The best way to explain this is by thinking about credit cards.
Imagine you want to know how much you spent in June. At the end of June, let’s say I buy a fancy gaming PC for $5,000 using my credit card, and the bill won’t be due until the middle of July. If I only use June’s checking account numbers to decide what I spent in June, I’ll have an incomplete picture of my finances. In July, I might be in for a nasty shock.
Now, before the accountants in the audience start getting angry, this analogy isn’t quite right, because we treat credit cards as bank accounts, and credit card transactions as cash transactions. But the idea I’m trying to get across to you here is: accrual accounting is about tying income and expenses to be the obligation or right to payment was incurred, not when the cash actually moved. The reason large businesses are required to use accrual accounting is so that their financial statements are accurate within a given period. For your small business, using accrual accounting will also give you a more accurate picture of the ebb and flow of the business, showing you exactly when in the year money is earned or spent. This is different from knowing your cash flow. Cash flow is important too, of course, but it’s different from earning and spending.
In practice most people encounter accrual accounting in their daily lives when dealing with invoices and bills. We call this part of bookkeeping “Accounts payable”, if we’re talking about paying our bills, or “Accounts receivable” if we’re talking about invoicing clients for our work.
If I’m a consultant and I do some work for a client, and I send that client an invoice with 60-day payment terms, accrual accounting says that I reflect that income on my ledger, or “book” it, when I do the word. That’s right - I accrued the income before I even sent an invoice. Using an Accounts Receivable process, when I send an invoice, I can transfer that money from accrued revenue to my accounts receivable asset account. When the client actually pays me, we transfer out of accounts receivables and into my bank account. In other words, the event where I earned the income - and reflected it on my books -was disconnected in time from the actual movement of cash.
Accounts payable is similar, just reflecting money that I owe for goods and services received that I haven’t paid for yet. In your personal life, think of getting an electric bill. In accrual accounting, you’d incur the expense for the bill the day you received it, even if you didn’t have to pay it until next month.
I hope this gives you a basic understanding of what people are talking about when they talk about keeping their books on a cash vs an accrual basis. This has been Counting Like It’s 1479 - thanks for watching!
A basic introduction to accrual vs cash accounting for casuals.
Today our topic is something that a lot of people think is scary - accrual accounting principles. It can have a lot of complexity, but the basic idea is pretty simple. Understanding accrual principles is valuable for anyone who wants to run a business. Today I’m going to try to give you a general intro to the topic, and will explain how it relates to two other terms you have have heard: Accounts Payable, and Accounts Receivable, or AP and AR.
Most of us live our daily lives thinking about our money on a cash basis. When someone asks you “How much money did you spend this month,” the way many of us would do it would be to look at our bank statements for last month and this month, add up all the payments we made, and give that as an answer.
But that answer may not be accurate, especially if we want to know how much we’ve spent in a certain period. The question about what exactly does “spend” mean is trickier than you might think. The best way to explain this is by thinking about credit cards.
Imagine you want to know how much you spent in June. At the end of June, let’s say I buy a fancy gaming PC for $5,000 using my credit card, and the bill won’t be due until the middle of July. If I only use June’s checking account numbers to decide what I spent in June, I’ll have an incomplete picture of my finances. In July, I might be in for a nasty shock.
Now, before the accountants in the audience start getting angry, this analogy isn’t quite right, because we treat credit cards as bank accounts, and credit card transactions as cash transactions. But the idea I’m trying to get across to you here is: accrual accounting is about tying income and expenses to be the obligation or right to payment was incurred, not when the cash actually moved. The reason large businesses are required to use accrual accounting is so that their financial statements are accurate within a given period. For your small business, using accrual accounting will also give you a more accurate picture of the ebb and flow of the business, showing you exactly when in the year money is earned or spent. This is different from knowing your cash flow. Cash flow is important too, of course, but it’s different from earning and spending.
In practice most people encounter accrual accounting in their daily lives when dealing with invoices and bills. We call this part of bookkeeping “Accounts payable”, if we’re talking about paying our bills, or “Accounts receivable” if we’re talking about invoicing clients for our work.
If I’m a consultant and I do some work for a client, and I send that client an invoice with 60-day payment terms, accrual accounting says that I reflect that income on my ledger, or “book” it, when I do the word. That’s right - I accrued the income before I even sent an invoice. Using an Accounts Receivable process, when I send an invoice, I can transfer that money from accrued revenue to my accounts receivable asset account. When the client actually pays me, we transfer out of accounts receivables and into my bank account. In other words, the event where I earned the income - and reflected it on my books -was disconnected in time from the actual movement of cash.
Accounts payable is similar, just reflecting money that I owe for goods and services received that I haven’t paid for yet. In your personal life, think of getting an electric bill. In accrual accounting, you’d incur the expense for the bill the day you received it, even if you didn’t have to pay it until next month.
I hope this gives you a basic understanding of what people are talking about when they talk about keeping their books on a cash vs an accrual basis. This has been Counting Like It’s 1479 - thanks for watching!
