Accrual accounting is a method of recording income and expenses when they’re earned or incurred, not when the money actually changes hands.

So, for example:

• If you send an invoice today for a job you did this week, that income is recorded now (when the work was completed), even if your customer pays you next month.

• Likewise, if you get a bill for materials today but don’t pay it until later, it’s still recorded as an expense today.

This approach gives a more accurate picture of your business’s financial position — showing what you’re owed and what you owe — rather than just what’s in your bank account at any given moment.

Who Uses Accrual Accounting?

Accrual accounting is typically used by:

• Limited companies – it’s required under UK accounting standards.
• Larger businesses – especially those with employees, contractors, or longer payment cycles.
• Businesses registered for VAT – because VAT returns are based on when invoices are raised, not when they’re paid.
• Contractors or service businesses – like those in construction or field services, where invoicing and payment often happen at different times.

See our guide here