Accounting and bookkeeping
Accrual accounting
Accrual accounting is a financial method where you record revenue when a sale occurs and expenses when you receive goods or services, regardless of when the actual cash changes hands.
What is Accrual accounting?
Accrual accounting requires you to recognise financial events as they happen, rather than waiting for money to enter or leave your bank account. If you deliver a service in November, you record the revenue in November, even if the client pays your invoice in December. The same principle applies to your expenses. When you receive supplies, you log the cost immediately, even if you have thirty days to pay the supplier. This matching principle ensures that your income and the costs associated with generating that income appear in the same reporting period. While it requires tracking accounts receivable and accounts payable, this method provides a highly accurate view of your financial health and obligations over time. Many tax authorities require larger businesses to use this method for corporate tax and VAT reporting.
How Accrual accounting works
The accrual method relies on double-entry bookkeeping to track money you are owed and money you owe others. When you make a sale on credit, you issue a tax invoice and immediately record the revenue. Because you have not received cash, you also record a corresponding increase in accounts receivable. When the client finally pays, you do not record new revenue. Instead, you decrease your accounts receivable and increase your cash balance. Purchasing works the same way in reverse. You record an expense when you receive a vendor bill, increasing your accounts payable. Paying that bill later simply reduces your payable balance and your cash. This ongoing process requires you to reconcile your bank statements regularly to ensure your recorded transactions match your actual cash flow.
- Deliver goods or services to your customer and issue a tax invoice.
- Record the sales revenue and increase your accounts receivable balance immediately.
- Receive the customer payment in your bank account at a later date.
- Increase your cash balance and decrease your accounts receivable by the payment amount.
- Record expenses as soon as you receive a supplier bill, increasing accounts payable.
Worked example
Imagine your IT agency completes a network installation for 5,000 OMR on 20 November. You issue an invoice with net-30 terms. Under accrual accounting, you record 5,000 OMR in revenue for November. On 5 December, you buy server racks for 1,000 OMR on credit, recording a 1,000 OMR expense for December. The client pays the 5,000 OMR on 18 December, and you pay your supplier 1,000 OMR on 4 January. Your November profit shows as 5,000 OMR. Your December profit shows as negative 1,000 OMR. The actual cash movements in December and January do not change when the profit is recognised.
Why it matters for your business
Using the accrual method gives you a realistic picture of your company's financial trajectory. If you only look at cash, a sudden drop in bank balance might cause panic, even if you have thousands in pending invoices. Accrual accounting smooths out these cash flow bumps by matching your earned income against your incurred costs. This visibility is essential when applying for bank loans or seeking investors, as financial institutions require standard financial statements. Paper & Pen automatically posts the correct journal entries when you create invoices and bills, keeping your ledgers accurate.
See also
Questions
Common questions
What is the difference between cash and accrual accounting?
Do I have to use accrual accounting for VAT?
Related terms
- Cash basis accounting Cash basis accounting is a bookkeeping method that records revenue only when money is received and expenses only when money is paid out, regardless of when the invoice was issued.
- Accounts receivable Accounts receivable represents the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.
- Accounts payable Accounts payable is the total amount of short-term debt your business owes to suppliers and vendors for goods or services that you have received but have not yet paid for.
- Double-entry bookkeeping Double-entry bookkeeping is a fundamental accounting method where every financial transaction requires at least two equal and opposite entries to keep the accounting equation perfectly balanced.
- General ledger A general ledger is the master accounting record of a business, containing all financial transactions categorised by account to track assets, liabilities, equity, revenue and expenses.
- Aging report An aging report is an accounting document that categorises a company's accounts receivable or payable based on the length of time an invoice has been outstanding.