What is Accrual Basis Accounting?

Accrual Basis Accounting is a method where revenue and expenses are recorded when they are earned or incurred, regardless of when cash is actually exchanged. This contrasts with cash-basis accounting, which only records transactions when money changes hands. Accrual accounting provides a more accurate picture of a company's financial performance and position over a specific period.

For Startups: In India, it is mandatory for all companies to follow the accrual basis of accounting. It is also the only method accepted by investors. It is crucial for correctly calculating key SaaS metrics like MRR and for managing deferred revenue, which are fundamental to a subscription business model.

Example: A startup signs an annual contract worth ₹1,20,000 in January and receives the full payment upfront. Under accrual accounting, it recognizes only ₹10,000 as revenue each month, even though it received all the cash in January.