Accrual Accounting
Definition
Recording revenue when you earn it and expenses when you incur them, not when cash moves. For inventory businesses it is the only way to see true monthly profit.
Want a deeper explanation?
Cash-basis books are simple, but for a business that buys inventory months ahead, they make profit jump around with your purchasing schedule. Accrual matches costs to the sales they produced, so each month's P&L reflects what really happened.
You still watch cash separately, through the cash flow statement and a forecast. Watch for: a P&L that shows a loss in your biggest buying month and a huge profit right after, which is a sign the books are not on accrual.
Example
You pay $40,000 for inventory in January but sell it in March. Under accrual, that cost hits your P&L in March as COGS, matching the sales.