Glossary
What is accrual accounting?
What the accrual basis means, why companies must use it, and how one credit sale lands in the month it was made rather than the month it was paid.
Updated
In short
Accrual accounting records income when it is earned and expenses when they are incurred, whatever the payment date. SimpleERP books on the accrual basis: posting an invoice records the sale and the receivable at once.
Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when money changes hands. A credit sale counts in the month of the invoice, and a bill counts in the month the goods or service arrived. Company law and accounting standards in most countries expect companies to keep their books on this basis.
Accrual accounting: a worked example
On 28 September 2026 Harbour Steel Furniture, a fictional business trading in US dollars, invoices Riverside Stores $5,000 plus 20% tax for steel racks. Riverside Stores pays on 15 October. The sale counts in September.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 28 Sep 2026 | Accounts Receivable: Riverside Stores | $6,000 | |
| 28 Sep 2026 | Sales | $5,000 | |
| 28 Sep 2026 | Tax payable | $1,000 | |
| 15 Oct 2026 | Bank | $6,000 | |
| 15 Oct 2026 | Accounts Receivable: Riverside Stores | $6,000 |
FAQ
Questions, answered
Is accrual accounting compulsory?
For companies, usually yes: company law and accounting standards in most countries require accrual books. Smaller businesses and sole traders may be allowed to use the cash basis for tax, as long as they apply it consistently. Ask your accountant which applies to your business.
Why use accrual accounting in a small business?
It shows the profit you actually earned in a month, including sales not yet paid and bills not yet settled. It also gives you receivables and payables, so you know who owes you and whom you owe at any moment.
Does VAT or GST follow the accrual basis?
Usually. In most VAT and GST systems tax is due on the invoice date or the date of supply, not the date the customer pays. That is one reason accrual books suit tax-registered businesses: the tax and the sale land in the same period.
How do I record an expense with no bill yet?
Post a manual journal at month end for the estimated amount, debiting the expense and crediting a payable account, then reverse it on the first of the next month. When the real bill arrives, record it as usual.
Related
Keep reading
Cash basis accounting
Recording income when money arrives and expenses when money leaves, ignoring unpaid invoices and bills.
Read moreAccrued expense
A cost already incurred but not yet billed or paid at the end of a period, recorded as a liability.
Read moreAccounts receivable
Money customers owe for goods and services already invoiced.
Read more
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