What it means
Under this method, a business records a transaction in the period it relates to. Unpaid invoices appear as receivables, and unpaid bills appear as payables, so the profit and loss report reflects the work done in a period. Cash basis accounting is the nearest neighbour. It records income and costs only when money is received or paid, which is simpler but can misstate what a period earned.
Why it matters when you buy software
Accounting software usually supports both methods, but reports, tax settings and features such as accruals, prepayments and deferred revenue can depend on the plan tier. Check which method a tool uses by default, whether you can switch, and whether its reports show the basis. Businesses that sell on credit or hold inventory often prefer the accrual method, and some tax rules require it above set size limits.
How it works in practice
A firm delivers a project in June and sends an invoice due in July. The software books the revenue in June and creates a receivable. When the customer pays in July, the receivable clears and cash rises, with no new revenue. A year-end journal can add costs for services received but not yet billed.
See also: Bank reconciliation, Accounts payable and the glossary index.