Accrual Accounting
What is Accrual Accounting?
Accrual accounting is a method that records revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. It is required under US GAAP and IFRS.
Updated November 2026 · 5 min read
Accrual accounting is the method of recording financial transactions in the period they relate to, rather than when cash is received or paid. Revenue is recognized when it is earned, and expenses are recognized when the related goods or services are used. A software license used throughout the year is expensed across the year, even if the invoice was paid in January, and consulting work done in December is expensed in December, even if the bill arrives in February.
Accrual accounting is the standard for most organizations of any size, and it is required by US GAAP and IFRS. For IT financial management, it explains why the costs reported in a month often differ from the cash spent, and why budget tracking, forecasting and cost allocation depend on accruals, prepayments and other adjustments. Understanding it is essential for anyone who manages technology budgets.
Definition of Accrual Accounting
Accrual accounting is an accounting method that matches revenues and expenses to the periods in which they are earned or incurred. It rests on two principles: the revenue recognition principle, which records revenue when it is earned, and the matching principle, which records expenses in the same period as the revenue or activity they support.
The alternative is cash accounting, which records transactions only when cash moves. Cash accounting is simpler but can give a misleading picture, since a large payment in one month or a delayed invoice can distort results. Accrual accounting gives a more accurate view of performance in each period.
Accruals
An accrual is an expense or revenue recognized before cash changes hands. An accrued expense, such as contractor work completed but not yet invoiced, is recorded as an expense and a liability. When the invoice is paid, the liability is cleared.
Accruals are common in technology spending. Cloud usage for the last days of a month, professional services delivered before billing and staff bonuses earned during the year are typical examples. Without accruals, these costs would appear in the wrong period. The effect is largest at quarter-end and year-end, when missing accruals can make one period look cheaper than it was and push the cost into the next, distorting trends and comparisons with plan.
Deferrals
A deferral is the opposite: cash changes hands before the expense or revenue is recognized. When an organization pays for an annual subscription upfront, it records the payment as a prepaid asset and recognizes the expense evenly over the subscription term. These are known as prepaid expenses.
Depreciation and amortization work in a similar way for long-term assets. The cost of a server or capitalized software is paid upfront but recognized as expense over the asset's useful life, following the same principle of matching cost to the periods that benefit.
Importance of Accrual Accounting in IT Financial Management
Technology spending is full of timing differences between payment and use. Annual licenses, multi-year contracts, hardware purchases, cloud bills that arrive after usage and implementation projects all create gaps between cash and expense.
Accrual accounting resolves these gaps, giving IT finance teams an accurate view of what technology costs in each period.
Accurate Budget Tracking
Most organizations manage budgets on an accrual basis, so actual costs are compared with budget in the periods they relate to. Without accruals, a large annual payment would make one month look badly over budget and the rest of the year under budget.
Accurate accruals make budget variance reporting meaningful. Budget owners can see whether they are genuinely over or under plan, rather than chasing differences caused by the timing of invoices.
Reliable Cost Allocation and Unit Costs
Cost allocation and unit costing depend on costs being recorded in the right period. If a quarter's cloud costs are recorded in the next quarter, unit costs and showback reports for both quarters are wrong.
Accrual accounting gives a stable base for cost allocation and service costing, so business units see costs that reflect their actual consumption in each period.
How to Apply Accrual Accounting
Applying accrual accounting to technology costs requires processes that capture spending as it is incurred, not only when it is invoiced or paid.
IT finance teams usually work with the accounting team during each month-end close to identify and record accruals and deferrals.
Recording Accruals at Month-End
At each month-end, the team identifies costs incurred but not yet invoiced. Sources include cloud consoles, which show usage before bills arrive, contractor timesheets, open purchase orders with delivered goods and vendor statements.
Accruals are estimates, so they are reversed when the actual invoice arrives and replaced with the real amount. Tracking the accuracy of accruals over time helps improve estimates and reduce surprises. Large or recurring differences between accrued and invoiced amounts usually point to a gap in the data used to estimate them, such as untracked usage or contracts missing from the procurement system.
Managing Prepayments and Amortization
Upfront payments for licenses, support contracts and subscriptions are recorded as prepaid assets and expensed over the service period. A schedule of prepaid items, showing the remaining balance and monthly expense for each, keeps these costs accurate.
Capitalized assets follow depreciation and amortization schedules. Keeping prepaid and fixed asset schedules up to date, and linking them to contracts and asset records, keeps the expense picture accurate through the year. These schedules are also a useful input to financial forecasting, since the expense they will produce in future months is already known.
Examples of Accrual Accounting in IT Financial Management
The examples below show how accrual accounting changes when technology costs are recorded.
Both use illustrative figures.
In each, accrual accounting produces a more accurate view of monthly costs than the timing of cash payments.
An Annual Software Subscription
A company pays $240,000 in January for an annual software subscription. Under cash accounting, January shows a $240,000 expense and the other eleven months show nothing.
Under accrual accounting, the company records a $240,000 prepaid asset and recognizes $20,000 of expense each month. Its monthly technology costs reflect the subscription's actual use, and January no longer looks badly over budget.
Cloud Usage Billed in Arrears
A company's cloud provider bills on the fifth of each month for the previous month's usage. At the end of March, the cloud console shows $185,000 of usage for the month, but no invoice has arrived.
The IT finance team records a $185,000 accrual in March. When the invoice for $187,500 arrives in April, the accrual is reversed and the actual amount is recorded, with the $2,500 difference recognized in April. March's costs are almost exactly right, rather than missing entirely. Without the accrual, March would show no cloud cost at all and April would show two months of usage, making both months' unit costs and budget comparisons misleading.
Conclusion
Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. It relies on accruals for costs not yet billed and deferrals for costs paid in advance, and it is required under US GAAP and IFRS.
In IT financial management, accrual accounting gives an accurate view of technology costs in each period. It underpins budget tracking, cost allocation and unit costing, and it requires disciplined month-end processes to capture accruals, prepayments and depreciation correctly.
Related terms
Prepaid Expenses
Prepaid expenses are payments made in advance for goods or services to be received in future periods. They are recorded as assets and expensed over the periods in which the benefit is used.
Budget Variance
Budget variance is the difference between a budgeted amount and the actual result for a period. It is favorable when costs come in under budget and unfavorable when they exceed it.
Cost Allocation
Cost allocation is the process of assigning shared costs to the products, services, departments or customers that use them. It shows the full cost of each and supports pricing, budgeting and chargeback.
Purchase Order
A purchase order (PO) is a document a buyer issues to a supplier to authorize a purchase, specifying the items or services, quantities, prices and terms. Once accepted, it becomes a binding commitment.