starter · Lesson 7 · 8 min
Accrual vs cash — and why Xero defaults to accrual
Accrual matches income and cost to the period they belong to. Cash records the bank. Reports can switch; habits cannot.
The matching principle
Accrual accounting recognizes revenue when it is earned (the work is done, the invoice is issuable) and expenses when they are incurred (the supplier delivered, the month of rent was used), not when cash moves. That is the matching principle: put cost next to the income it helped produce.
| Event | Accrual books | Cash books |
|---|---|---|
| Invoice a client in March, paid in April | March revenue and AR | April revenue |
| Receive a March bill, pay in April | March expense and AP | April expense |
| Pay April rent in March | Prepaid in March, expense in April | March expense |
| Buy a $6,000 mower with 5-year life | Asset, then depreciate | Often all $6,000 in the purchase month (tax rules aside) |
Software defaults
Xero’s default reports are accrual. There is a cash-basis toggle on the P&L and Balance Sheet. QuickBooks Online is the same: reports can be cash or accrual. Switching the toggle does not rewrite invoices. It changes which unreceived or unpaid items are included.
US tax is a separate decision
Many sole proprietors and small LLCs file on cash for federal income tax. Inventory, C corporations over a size threshold, and some other cases require accrual. Bookkeeping can still be accrual. Your CPA maps books to the return. Do not recode the whole year to cash in Xero to “make the return easier” — export, schedule, and ask.
Check
Choices shuffle each visit. Misses send you back to the section — Look back clears the quiz so you can try again.
Choose an answer, then check.
On 31 March you invoice $2,400 for a job finished that day. The client pays 10 April. Accrual March revenue is:
Practice: Which month’s revenue?