Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. It provides a more accurate picture of your financial position than cash accounting.
Accrual accounting is the standard method used by most businesses and required by most accounting standards. Under accrual accounting, you record revenue when you deliver goods or complete a service (not when you receive payment) and expenses when you incur them (not when you pay). This means your financial statements reflect the true economic activity of your business during each period. For example, if you complete a project in March but the client pays in April, the revenue is recorded in March under accrual accounting. The main advantage is accuracy - your profit and loss statement shows what you truly earned and spent in each period. The downside is complexity compared to cash accounting. In Xero, accrual accounting is the default method. SortBooks supports accrual accounting by tracking invoices, bills, prepayments and accrued expenses - ensuring your financial statements comply with accounting standards and give you a true picture of your business performance.
SortBooks helps with the bookkeeping behind accrual accounting by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing accrual accounting by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Cash accounting records revenue when cash is received and expenses when cash is paid, regardless of when the goods or services were delivered or received.
Revenue recognition determines when and how revenue is recorded in your financial statements. Under accrual accounting, revenue is recognised when earned, not necessarily when cash is received.
The matching principle requires expenses to be recorded in the same period as the revenue they helped generate, ensuring accurate profit measurement for each period.
Prepaid expenses are payments made in advance for goods or services you will receive in future periods. They are current assets that are expensed as the benefit is consumed.
Accrued expenses are costs your business has incurred but not yet been billed or paid for. They are recorded as current liabilities to accurately reflect your obligations.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.