Accrual Accounting is the practice of recording revenue when it is earned and expenses when they are incurred, rather than when money is received into or spent from the bank account.
Accrual accounting is the basis required under 📝GAAP and stands in contrast to the 📝Cash Basis, which recognizes revenue and expenses only as cash moves. Because the timing of the books and the timing of the bank differ, accrual accounting uses balance sheet accounts to hold the difference until the two line up.
A prepayment is the common asset-side example. A company that prepays $1,000 for a year of software, instead of paying month to month, records the $1,000 in an asset account called Prepaid Expenses and deducts $83.33 as expense each month for twelve months. Billing in arrears works the other way: a company that invoices at the end of the month for hours worked, units processed, or items shipped, on 60-day payment terms, records the revenue when earned but must finance about 90 days of work before the cash arrives. An accrued expense covers a service already received but not yet billed: if a $5,000 invoice is expected, the company records $5,000 of expense and holds $5,000 in a liability account called 📝Accrued Liability.
Performing these accruals is a core step of the traditional 📝Month End Close, the monthly process that 📝Weekly Accounting replaces with a weekly cadence.