Skip to Main Content
HBS Online
  • Courses
    Open Courses Mega Menu
    • Business Essentials
      • Credential of Readiness (CORe)
      • Business Analytics
      • Economics for Managers
      • Financial Accounting
    • Leadership & Management
      • Leadership Principles
      • Management Essentials
      • Negotiation Mastery
      • Organizational Leadership
      • Strategy Execution
      • Power and Influence for Positive Impact
      • Leadership, Ethics, and Corporate Accountability
    • Entrepreneurship & Innovation
      • Entrepreneurship Essentials
      • Disruptive Strategy
      • Negotiation Mastery
      • Design Thinking and Innovation
      • Launching Tech Ventures
    • Strategy
      • Strategy Execution
      • Business Strategy
      • Economics for Managers
      • Disruptive Strategy
      • Global Business
      • Sustainable Business Strategy
    • Finance & Accounting
      • Financial Accounting
      • Leading with Finance
      • Alternative Investments
      • Sustainable Investing
    • Business in Society
      • Sustainable Business Strategy
      • Global Business
      • Sustainable Investing
      • Power and Influence for Positive Impact
      • Leadership, Ethics, and Corporate Accountability
    • All Courses
  • For Organizations
    Open For Organizations Mega Menu
    • Corporate Learning
      Help your employees master essential business concepts, improve effectiveness, and expand leadership capabilities.
    • Academic Solutions
      Integrate HBS Online courses into your curriculum to support programs and create unique educational opportunities.
    • Need Help?
      • Frequently Asked Questions
      • Contact Us
    • Black, Latinx, and underrepresented minority professionals
      Pathways to Business

      Stories designed to inspire future business leaders.

  • Insights
    Open Insights Mega Menu
    • Business Insights Blog
      • Career Development
      • Communication
      • Decision-Making
      • Earning Your MBA
      • Entrepreneurship & Innovation
      • Finance
      • Leadership
      • Management
      • Negotiation
      • Strategy
    • All Topics
    • Sample Business Lessons and E-Books

      Gain new insights and knowledge from leading faculty and industry experts.

    • Free Guide

      Learn how to formulate a successful business strategy.

  • More Info
    Open More Info Mega Menu
    • Learning Experience
      Master real-world business skills with our immersive platform and engaged community.
    • Certificates, Credentials, & Credits
      Learn how completing courses can boost your resume and move your career forward.
    • Learning Tracks
      Take your career to the next level with this specialization.
    • Financing & Policies
      • Employer Reimbursement
      • Payment & Financial Aid
      • Policies
    • Connect
      • Student Stories
      • Community
    • Need Help?
      • Frequently Asked Questions
      • Request Information
      • Support Portal
    • Apply Now
Login
My Courses
Access your courses and engage with your peers
My Account
Manage your account, applications, and payments.
HBS Home
  • About HBS
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
HBS Online
  • Courses
  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Insights
  • More Info
  • About
  • Support Portal
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers
  • My Courses
  • My Account
  • Apply Now
  • …→
  • Harvard Business School→
  • HBS Online→
  • Business Insights→

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

 
Filter Results Arrow Down Arrow Up

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Launching Tech Ventures
  • Leadership Principles
  • Leadership, Ethics, and Corporate Accountability
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
*
Please complete this required field.
Email must be formatted correctly.
Please complete all required fields.
RSS feed

Filters

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Launching Tech Ventures
  • Leadership Principles
  • Leadership, Ethics, and Corporate Accountability
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
*
Please complete this required field.
Email must be formatted correctly.
Please complete all required fields.
RSS feed

What Is Accrual Accounting?

accountant working with calculator
  • 29 Sep 2016
HBS Online Author Staff
tag
  • Accounting
  • Business Essentials
  • CORe
  • Finance
  • Financial Accounting

Gone are the days when organizations paid cash for the goods and services they needed. More often than not, companies (and individuals) prepay or pay later for goods and services. So, how do organizations keep track of these non-cash transactions?

The form of financial accounting that allows companies to keep up with these more complicated transactions is called accrual accounting. As a result, more companies are looking for highly skilled financial accounting professionals, well-versed in this method. Here’s an overview of the accrual accounting method and why so many organizations rely on it.

What Is Accrual Accounting and Why Is It Important?

Accrual accounting is an accounting method that recognizes revenue in the period in which it’s earned and realizable, but not necessarily when the cash is actually received. Similarly, expenses are recognized in the period in which the related revenue is recognized rather than when the related cash is paid.

The accrual method of accounting is based on the matching principle, which states that all revenue and expenses must be reported in the same period and “matched” to determine profits and losses for the period. It’s often compared against cash accounting.


Free E-Book: A Manager's Guide to Finance & Accounting

Access your free e-book today.



Accrual Accounting vs. Cash Accounting

While accrual accounting is the most widely used accounting method, some businesses prefer to use cash basis accounting. Cash accounting is an accounting method in which revenue is only recorded when cash is received, and expenses are recorded after cash payments are made.

The main difference between accrual and cash accounting is when transactions are recorded. Accrual accounting recognizes income and expenses as soon as the transactions occur, whereas cash accounting does not recognize these transactions until money changes hands.

Cash accounting is the easier of the two methods, as organizations only need to record transactions when cash is exchanged. For most companies, however, this method doesn’t provide an accurate view of financial health.

The Advantages of Accrual Accounting

Although it’s the more complex of the two major accounting methods, accrual accounting is considered the standard accounting practice for most organizations. Using accrual accounting, companies look at both current and expected cash flows, which provides a more accurate snapshot of their financial health.

Accrual accounting is helpful because it shows underlying business transactions, not just those with cash involved. Most transactions a company has are straightforward, with payment happening at the time of the transaction. Other, more complicated transactions involve buying and selling on credit, which requires a company to account for monies that they will have to pay or receive at a future date.

Even more complicated are transactions that require paying for goods or services or receiving money from customers in advance. The timing of when revenues and expenses are recognized related to these more complicated transactions can have a major effect on the perceived financial performance of a company.

Types of Accruals

The revenues a company has not yet received payment for and expenses companies have not yet paid are called accruals. Here are the four types of accruals typically recorded on the balance sheet when following the accrual accounting method.

1. Deferred Revenue

When a company receives cash before a good has been delivered or a service has been provided, it creates an account called deferred revenue, also referred to as unearned revenue. This account is a liability because the company has an obligation to deliver the good or provide the service in the future.

Suppose you paid a gym $1,200 for a year-long membership ($100 per month). Using the accrual accounting method, the gym would set up a deferred revenue account (a liability) for the $1,200 to show that it had received the cash but not yet provided the service.

As each month of the year passes, the gym can reduce the deferred revenue account by $100 to show it's provided one month of service. It can simultaneously record revenue of $100 each month to show that the revenue has officially been earned through providing the service.

2. Accrued Revenue

Accrued revenue occurs when a company has delivered a good or provided a service but hasn’t yet received payment. These accounts are often seen in the cases of long-term projects, milestones, and loans.

For example, let’s say that a clothing retailer rents out a storefront for $2,500 per month, paying each month’s rent on the first day of the following month. This means that the landlord doesn’t receive payment until after services have been provided. Using the accrual accounting method, the landlord would set up an accrued revenue receivable account (an asset) for the $2,500 to show that they have provided services but haven’t yet received payment.

3. Prepaid Expenses

When a company pays cash for a good before it is received, or for a service before it has been provided, it creates an account called prepaid expense. This account is an asset account because it shows that the company is entitled to receive a good or a service in the future.

For example, imagine a dental office buys a year-long magazine subscription for $144 ($12 per month) so patients have something to read while they wait for appointments. At the time of the payment, the dental office sets up a prepaid expense account for $144 to show it has not yet received the goods, but it has already paid the cash.

As each month of the year passes, the dental office can reduce the prepaid expense account by $12 to show it has ‘used up’ one month of its prepaid expense (asset). It can simultaneously record an expense of $12 each month to show that the expense has officially incurred through receiving the magazine.

4. Accrued Expenses

Accrued expenses, also known as accrued liabilities, occur when a company incurs an expense it hasn't yet been billed for. Essentially, the company received a good or service that it will pay for in the future. In the meantime, the expense is an accrued liability.

Suppose a company relies on a utility, like an internet connection, to conduct business throughout the month of January. However, it pays for this utility quarterly and will not receive its bill until the end of March. Even though it can’t pay for it until March, the company is still incurring the expense for the entire month of January. The expected cost of internet for the month will need to be recorded as an accrued expense at the end of January.

Access Your Free E-Book: A Manager's Guide to Finance and Accounting | Download Now

Choosing the Right Accounting Method

While cash accounting is a viable option and often a good fit for smaller businesses, accrual accounting generally provides a more comprehensive view of a company’s financial health. Following this method of accounting, you can prepare more accurate financial statements that can be used to inform strategic decisions at your organization.

Do you want to develop or hone your financial accounting skills? Explore our eight-week online course Financial Accounting and other finance and accounting courses to discover how managers, analysts, and entrepreneurs leverage accounting to drive strategic decision-making.

This post was updated on July 12, 2021. It was originally published on September 29, 2016.

 
All FAQs

Top FAQs

How are HBS Online courses delivered?

+–

We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

Are HBS Online programs available in languages other than English?

+–

We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English.

All course content is delivered in written English. Closed captioning in English is available for all videos. There are no live interactions during the course that requires the learner to speak English. Written English proficiency should suffice.

Do I need to come to campus to participate in HBS Online programs?

+–

No, all of our programs are 100 percent online, and available to participants regardless of their location.

How do I enroll in a course?

+–

All programs require the completion of a brief application. The applications vary slightly from program to program, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

Our easy online application is free, and no special documentation is required. All applicants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

After submitting your application, you should receive an email confirmation from HBS Online. If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted.

Updates to your application and enrollment status will be shown on your Dashboard. We confirm enrollment eligibility within one week of your application.

Does Harvard Business School Online offer an online MBA?

+–

No, Harvard Business School Online offers business certificate programs.

What are my payment options?

+–

We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.

In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

What are the policies for refunds and deferrals?

+–

After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

 

Sign up for News & Announcements


  • • Please complete this required field.
  • • Email must be formatted correctly.
  • • Please complete all required fields.

Subject Areas

  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business & Society

Quick Links

  • FAQs
  • Contact Us
  • Request Info
  • Apply Now
  • Support Portal

About

  • About Us
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers @ HBS Online

Legal

  • Legal
  • Policies
Harvard Business School
Copyright © President & Fellows of Harvard College
  • Site Map
  • Trademark Notice
  • Digital Accessibility