Accrual accounting

Accrual accounting follows the event, not the cash. The IRS explains that under the accrual method you generally report income in the year you earn it, whether or not you have been paid. You deduct expenses in the year you incur them, even if you pay later.

This differs from the cash method, which records income and expenses when money moves. Accrual books give a truer picture of profit, so lenders often prefer them. Many small businesses can use either method, and some must use accrual. The choice shapes your profit and loss statement and your bookkeeping. The small business accounting page covers method choices.