What is accrual accounting and how does it affect invoice collection?

Under accrual accounting, issuing an invoice immediately increases revenue and accounts receivable, even though no cash has arrived. A business can show a profitable income statement while running out of cash — a common situation when clients pay slowly. This is why understanding the difference between profit and cash flow is essential for any business using accrual-basis books.

Accrual accounting is required for businesses above certain revenue thresholds under US GAAP and is the standard for most incorporated businesses with investors or bank financing. It gives a more accurate picture of long-run financial performance but requires careful AR management because aging receivables can distort the apparent financial position.

For invoice collection, the accrual method creates a specific tax and write-off dynamic: revenue is recognized (and taxed) when invoiced, not when paid. If a client never pays, the business has paid tax on income it never received. Writing off the bad debt creates a deduction that reverses this — but only in the year the debt becomes genuinely uncollectible, and only if proper documentation exists.