What is accrual accounting? Definition, benefits, and examples

That’s where accrual accounting comes in. It’s a way of tracking money that’s earned or owed, even if the cash hasn’t moved yet. For example, say you send an invoice today but don’t get paid until next month. With accrual accounting, that income still shows up today, when you earned it, not later when the check hits.

This helps you see the full picture of your financial health, not just what’s in the bank right now. It’s kind of like looking at both the weather and the forecast, instead of just sticking your head out the window. For nonprofits, businesses, and anyone trying to make smart decisions with their money, that’s a game changer.

How accrual accounting works

Accrual accounting is all about timing. It tracks money when you earn it or owe it, not just when cash moves in or out of your bank account. That means if you send an invoice today, you count that as income today, even if the payment shows up next week. The same goes for bills, you record them when they happen, not when you actually pay them.

This is different from cash accounting, which only looks at what’s been paid or received. With accrual, you’re matching the money to the work, like logging a donation when someone pledges it, not when the funds clear.

This system follows something called the matching principle. It just means you try to line up your income and expenses in the same time period. That way, you get a clearer view of how your organization is actually doing.

And here’s the thing: most accounting standards, like GAAP, the generally accepted accounting principles, prefer accrual. It’s considered more accurate, especially if you're growing, applying for grants, or reporting to a board.

Key components: accrued revenue, accrued expenses, and accounts payable

Let’s break this down into three pieces. These are the core parts of how accrual accounting works in real life.

Accrued revenue

This is money you’ve earned but haven’t been paid for yet. Say you run a training event in September, send the invoice the next day, and the payment doesn’t come until October. With accrual accounting, that income still shows up in September, because that’s when the work happened. This helps you stay in sync with the services you actually delivered.

Accrued expenses

This is the flip side. Maybe you get your electric bill at the end of the month, but you won’t pay it until next month. Even though the cash hasn’t gone out yet, you record that expense right away. That way, your books reflect what it really cost to run things in that time period.

Accounts payable

This is the total of what you owe to others, like vendors, contractors, or utilities. Think of it like a running to-do list of bills you haven’t paid yet. It helps you keep track of upcoming payments and stay ahead, so you’re not caught off guard later.

These three pieces work together to give you a more accurate, big-picture view of your finances. It’s not just about what you have right now, it’s about what’s coming in and what’s going out.

Cash basis accounting vs. accrual accounting

Let’s say you get a donation today, but it doesn’t actually hit your bank account for a week. If you’re using cash basis accounting, you wouldn’t count that donation until the money lands. But if you’re using accrual accounting, it gets recorded right away, because that’s when it was earned.

Cash basis is simple. It tracks money when it moves. That makes it easier to manage if you’re a small team or just getting started. But it can give a misleading view of your financial health. For example, you might look “profitable” just because a big check came in, even if you haven’t paid your bills yet.

Accrual accounting is more work, but it shows what’s really going on. You’ll see income when it's earned and expenses when they happen, not just when the cash moves. This helps you plan better, catch problems early, and stay aligned with GAAP, which is required if you’re over a certain size or applying for larger funding.

Here's a quick comparison:

If you want to know what’s really happening, not just what’s in your bank, accrual accounting gives you the truth.

Benefits of accrual accounting for long-term financial health

Accrual accounting gives you more than numbers, it gives you insight. When you see income and expenses lined up with when the work actually happened, it’s easier to spot trends, plan ahead, and make better decisions.

One of the biggest benefits? It helps you understand your true financial health. Not just what’s in the bank, but what’s coming in, what’s going out, and what you still owe. That’s a big deal when you’re budgeting, reporting to a board, or applying for grants.

Accrual also supports long-term planning. Because you’re not just reacting to the cash you have today, you’re seeing the full picture. That helps with forecasting, spotting gaps early, and investing in what’s working.

And if you’re aiming to grow, you’ll likely need to switch to accrual anyway. Most accepted accounting principles (GAAP) require it once you pass certain thresholds. So getting comfortable with it now sets you up for success later.

Bottom line? Accrual may take a little more work, but it gives you way more control. And when you're managing a mission, a team, or both, clarity like that is priceless.

Common challenges and how to solve them

Let’s be real, accrual accounting isn’t always easy. If you’re used to seeing things only when money hits the bank, this new way of thinking can feel backwards at first.

One big challenge is timing. You might earn income now but not see the cash for weeks. Or you might owe money for something you’ve already used, but the bill hasn’t come yet. Without a system to track all that, it’s easy to lose your footing.

Another struggle? Manual tracking. If you’re still using spreadsheets, things can slip through the cracks, fast. It takes a lot of focus (and time) to keep everything lined up just right.

And then there’s the risk of confusing your team. Not everyone thinks in terms of “accrued expenses” or “deferred revenue.” If your reports don’t make sense to the folks who rely on them, your decision-making takes a hit.

But here’s the fix: don’t do it alone. Use tools that help you track accruals automatically. Train your team on the basics so they know what to look for. And if you need extra support, bring in a partner who’s done this before.

We’ve helped organizations clean up their books, spot leaks in their systems, and build confidence in their numbers. You don’t have to be perfect, just willing to take that first step toward clarity.

Transitioning from cash to accrual: what small businesses need to know

Switching from cash to accrual accounting might sound like a big lift, but it’s doable, especially if you break it into steps. Most small teams don’t switch overnight, and that’s okay. The goal isn’t perfection, it’s progress.

Start by getting clear on why you’re switching. Maybe you want better insight into your finances, or you need to meet grant reporting standards, or your board is asking for more accurate reports. Having that “why” helps guide your decisions along the way.

Next, you’ll need to track unpaid invoices and upcoming bills. This means setting up a system to log income when it’s earned (even if you haven’t been paid yet) and expenses when they happen (not just when you pay them). You don’t need fancy software to start, but it helps to have tools that keep it all in one place.

Be prepared for a little learning curve. Some months will feel confusing. That’s normal. The good news? Once it’s up and running, accrual gives you a much more reliable way to plan, forecast, and grow.

If you’re doing this on your own, consider getting help from an expert, someone who knows the difference between a clean transition and a stressful one. At Harness, we’ve walked this road with hundreds of nonprofits and small teams, and we’re here when you’re ready.

Industry-specific use cases and applications

Accrual accounting isn’t one-size-fits-all. Different industries, and even different teams within an organization, use it in ways that match their work. Let’s look at how it shows up in real life.

Nonprofits and mission-driven organizations

If you’re managing donations, grants, or program expenses, accrual helps you line everything up with the right reporting period. This is huge when you're applying for funding or showing impact. It also keeps your board and stakeholders confident that the numbers reflect your actual activity, not just what’s in the bank.

SaaS and subscription-based businesses

These teams often bill upfront for services that get delivered over time. Accrual accounting makes it easy to spread that revenue across the months it actually covers. That keeps reports from looking too good one month and too weak the next.

Retail, healthcare, and legal services

In these industries, inventory, staffing, and service timing can all affect when revenue and expenses happen. Accrual helps track things like supplies used (even before the bill hits) or services provided (before payment comes through). It smooths out the ups and downs so leaders can see what’s really happening under the hood.

Bottom line: no matter your field, accrual helps match income and costs to the work being done. That means fewer surprises and better decisions.

How software and automation improve accrual accounting

Let’s be honest, doing accrual accounting by hand can be a headache. Tracking when income was earned, logging bills before they’re paid, and updating reports manually? That’s a lot to juggle, especially if you’re also wearing five other hats.

That’s where the right tools make a big difference. With good software, you can automate the boring stuff, like tracking recurring bills, scheduling revenue over time, and syncing payments with your donor or customer data. You don’t have to remember every due date or dig through old spreadsheets.

Systems like ERPs, accounting platforms, or custom dashboards help you stay organized. They make sure your financial statements reflect real activity, not just cash in and out. Plus, they cut down on mistakes, no more forgetting to log that expense or double-counting income.

And if you're using a platform like Harness, you can go even further. We make it easier to track giving, manage recurring donations, and connect every dollar to impact. That way, your team can focus on the mission, not just the math.

The takeaway? You don’t need to be a finance pro to get accrual right. You just need the right system, and maybe a little backup.

Make smarter decisions

Accrual accounting isn’t just about numbers, it’s about seeing your full story. When you track income and expenses based on when things happen, not just when money moves, you get a much sharper view of what’s really going on.

It helps you plan better, report more honestly, and make smarter decisions, whether you’re running a small team, applying for funding, or trying to grow without flying blind. Yes, it takes a little more effort than cash accounting. But that effort pays off in peace of mind and stronger long-term strategy.

If you’re ready to stop guessing and start seeing your finances clearly, we can help. At Harness, we’ve helped mission-driven teams build simple, scalable systems that support real growth, without all the accounting stress.