Accrual accounting in QuickBooks Online is one of the most effective ways to understand your company’s true financial position. Instead of relying on cash-only transactions that provide a limited snapshot, the accrual method captures revenue when earned and expenses when incurred – giving you a full, accurate financial picture.
Accrual accounting is more than just another bookkeeping method — it’s the foundation of accurate financial reporting for growing businesses. Whether you’re scaling your operations, hiring new team members, or preparing to enter new markets, understanding how accrual accounting works can transform how you view your company’s performance.
In this comprehensive guide, you’ll learn how to set up accrual accounting in QuickBooks Online, manage journal entries, streamline financial reporting, and transition smoothly from cash to accrual. You’ll also explore industry-specific applications, adjusting entries, and revenue recognition techniques to ensure your books are clean, compliant, and insightful.
What Is Accrual Accounting?
Accrual accounting records income and expenses when they occur – not when cash changes hands. This method aligns revenue with the period it was earned and matches expenses to the period incurred. As a result, you get a more accurate view of profitability, performance, and long-term financial health.
Unlike cash basis accounting—where income and expenses are recorded only when cash moves—accrual accounting ensures every transaction appears in the correct period. This includes:
- Accounts Receivable
- Accounts Payable
- Deferred Revenue
- Prepaid Expenses
- Fixed Asset Purchases
QuickBooks Online supports the accrual method through manual entries, customized charts of accounts, and integrated tools like Accruer, which automates recurring accrual entries.
Key Benefits of Accrual Accounting
Accrual accounting delivers a clearer financial picture and supports better decision-making. Some of its most valuable benefits include:
- Accurate tracking of income and expenses
- Improved visibility into true profitability
- Stronger budgeting and forecasting
- Better management of accounts payable and accounts receivable
- Easier preparation of income statements and balance sheets
- Useful trend analysis for long-term strategic planning
- Enhanced compliance with IRS and GAAP requirements
- More precise tracking of assets, liabilities, and inventory
- Improved tax planning and financial transparency
When paired with QuickBooks Online, these advantages become even more powerful thanks to automated reporting and easy-to-read dashboards.
Why Accurate Financial Reporting Matters?
Accurate reporting is the backbone of smarter business decisions. Accrual accounting ensures your statements reflect work completed—not just cash received.
For example, if you finish a client project in December but don’t get paid until January, accrual accounting shows the revenue in December. This gives you reliable month-end data, so you can evaluate performance correctly and plan for what’s ahead.
How to Set Up Accrual Accounting in QuickBooks Online?
Switching QuickBooks Online to accrual mode is simple:
- Go to Company Settings
- Click Advanced
- Select Accounting
- Under Reports, choose Accrual
- Turn on Use Accrual Accounting
- Click Save
Setting Up Revenue Recognition
QuickBooks Online allows manual revenue recognition schedules:
- Go to Sales & Expenses → Products & Services
- Click New → Service
- Fill out the details
- Select I recognize revenue for this product/service over time
- Set the start and end dates
- Choose your recognition frequency
- Save and close
QuickBooks Online handles revenue schedules manually, but third-party tools can automate the entire process.
Setting up accrual accounting in QuickBooks Online can help you get a clearer picture of your finances. If you need step-by-step guidance or personalized support, contact us today at 1-888-820-7278! Our experts are here to ensure your setup is smooth and accurate, so you can make the most of your accounting system.
Establishing Your Financial Reporting Period
Once accrual accounting is active, you’ll need to determine how often you review your financial reports—monthly, quarterly, or annually. A consistent reporting period helps you compare results, track trends, and evaluate growth.
Timely and organized reporting also helps identify cash flow gaps, unnecessary expenses, and opportunities for improvement.
Setting Up Accounts Correctly
A clean, well-organized chart of accounts is essential for accurate accrual accounting. When setting up your accounts in QuickBooks Online, consider:
- Business Structure: Sole proprietors, LLCs, corporations, and partnerships all require different sets of equity and expense accounts.
- Industry Needs: project tracking, inventory, services, or recurring billing
- Tax Requirements: sales tax, payroll taxes, or other mandated accounts
- Reporting Goals: departmental insights, segment performance, or location-based data
QuickBooks Online also supports Classes, Locations, and Departments—perfect for tracking revenue and expenses across business divisions, product lines, or locations.
Transitioning from Cash to Accrual Accounting
Switching to accrual doesn’t have to be complicated. Follow these steps:
- Back Up Your Data: Always preserve your current records before making major accounting changes.
- Create New Accounts: Add accounts for deferred revenue, prepaid expenses, accrued income, and accrued expenses.
- Enter Opening Balances: This ensures your receivables and payables reflect your current financial position.
- Make Adjusting Entries: Adjust past cash-based transactions to align them with accrual principles.
- Reconcile Accounts: Verify accuracy after adjusting balances.
- Review Reports: Check accrual-based reports for clarity and accuracy.
- Notify Stakeholders: Communicate changes to investors, lenders, or partners to maintain transparency.
Also Find: How to Find Missing Downloaded Transactions in QuickBooks Online?
Adding Journal Entries in QuickBooks Online
To add a journal entry:
- Go to Company
- Select Make General Journal Entries
- Enter debits and credits
- Save
Example: If you invoice $12,000 for services delivered over 12 months, accrual accounting recognizes $1,000 each month—not the full $12,000 immediately.
Recording Accrued Revenue, Deferred Revenue, and Expenses
- Accrued Revenue: Income earned but not yet paid. Example: Work completed in December, paid in January.
- Deferred Revenue: Cash received before work is done. Example: Annual subscriptions paid upfront.
- Accrued Expenses: Costs incurred but not yet paid. Example: Wages earned in December but paid in January.
- Prepaid Expenses: Payments made in advance for future benefit. Example: Insurance premiums for a full year.
These entries ensure your financial statements accurately match expenses with the period they belong to.
Cash Basis vs Accrual Basis Accounting
Cash Basis
- Simple and easy to manage
- Tracks only cash transactions
- Not suitable for complex or growing businesses
Accrual Basis
- Recognizes revenue and expenses when earned
- Provides deeper insight
- Required by the IRS for businesses earning over $25M
Choose based on complexity, industry standards, and IRS requirements.
Accrual Accounting in Key Industries
- Construction: Track revenue by project milestones for long-term contracts.
- Real Estate: Recognize rental income monthly instead of when cash arrives.
- SaaS: Spread subscription revenue evenly over the contract term.
- Insurance: Recognize premium revenue throughout the coverage period.
IRS Requirements for Accrual Accounting
Businesses averaging $25 million+ in revenue over the past three years must use accrual accounting for tax purposes. Staying compliant avoids penalties and ensures accurate reporting.
Final Thoughts
Accrual accounting in QuickBooks Online gives you the clarity, accuracy, and control needed to run a financially healthy business. Whether you’re tracking deferred revenue, setting up adjusting entries, or automating accruals, QuickBooks offers the flexibility and depth you need to make informed decisions, forecast growth, and maintain compliance.
By understanding and mastering accrual accounting, you empower your business to thrive with accurate financial insights and long-term stability.
Frequently Asked Questions
You can switch your reporting method by opening the report settings in QuickBooks Online and changing the accounting method from accrual to cash. This adjustment updates how your reports display financial activity.
The fundamental rule of accrual accounting is to record revenue when it is earned and expenses when they are incurred, regardless of when the money is actually received or paid.
Cash basis accounting is considered the opposite of accrual accounting, as it only records transactions when cash enters or leaves your business.
Accrual accounting relies on adjusting journal entries to document revenue earned or expenses incurred before the related cash movement happens—for example, accrued revenue or accrued expenses.
Month-end accruals in QuickBooks are adjusting entries created at the end of the month to reflect income or expenses that belong to that period but haven’t yet been received or paid.
QuickBooks offers limited automation for recurring journal entries, but full automation of month-end accruals typically requires the use of third-party applications or integration tools designed for automated accrual processes.
