Accrual accounting is the practice of recording revenue and expenses at the time they are earned or incurred, rather than when money changes hands. This approach is in contrast to cash accounting, where transactions are recorded when money is physically received or spent. Accrual accounting provides a more accurate picture of financials over time because it captures all active financial obligations. For example, if you’ve sold an item but haven’t yet been paid for it, accrual accounting would recognize that sale as income even though no money has been collected. On the flip side, costs like rent would still be recognized as an expense even when it may not have yet been paid for. In essence, using accrual accounting will allow you to recognize the true net effect of economic activity during a given period.