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.
Dotted words have a reminder. Hover on a computer, tap on a phone.
From earlier
- AR
- AP
- P&L
- QBO
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 | Still an asset. Cash basis does not expense capital equipment. Tax §179 or 100% bonus is a return election, not a book code. |
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 does not, by itself, force accrual: a small-business taxpayer under the IRC §448(c) gross-receipts test (about $32 million average over the prior three years for 2026) may keep the cash method and treat stock as non-incidental materials and supplies under §471(c). C corporations and partnerships with a C-corp partner must use accrual only if they fail that test. Tax shelters cannot use cash. Capital equipment is still capitalized on both books and the return unless the CPA elects Section 179 or bonus depreciation. 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. Practice drills deal a new problem on try-again.
Choose an answer, then check.
This try
On March 31 you invoice $2,400 for a job finished that day. The client pays April 10. Accrual March revenue is:
Practice this
Stay in the flow — open a drill without backing out to the list.