Accrual Accounting: How It Works and Why AP Teams Care

Most AP teams are familiar with the mechanics of their work: receive invoice, match to purchase order, route for approval, schedule payment. What is less often discussed is the accounting standard that governs when and how each of those steps must be recorded. That standard is accrual accounting, and it has a direct, daily impact on every AP function in every business that operates under it.

While most AP teams know the daily process of their work by heart, which they must, the knowledge of the accounting standard that governs each step of the AP process is fairly low. That is accrual accounting – an accounting standard that has a direct impact on the AP function in every business.

Despite its importance, the gap between accounting theory and AP operations practice is wide. In 2024, 74% of AP teams reported being only partially automated, with just 5% fully automated, according to the IFOL / SAP Concur Accounts Payable Automation Trends 2024 Research Report. Those number is key for accrual accounting as the speed, accuracy and audit trail it requires is something manual AP cannot consistently offer.

This is a guide that defines accrual accounting from the AP team’s perspective. It also covers how it works, what operational challenges it creates and how AP teams can close the gap between what manual teams can deliver versus what accrual accounting requires.

What Is Accrual Accounting?

Accrual accounting is the method of recording financial transactions when they occur economically, not when cash is exchanged. Under accrual accounting, a business records an expense on the day it receives a product or service, even if the invoice is not paid until much later. Similarly, revenue is recorded when it is earned, not when the customer pays.

This method rests on two foundational accounting principles:

• The Matching Principle: expenses are recognized in the same accounting period as the revenues they help generate. If a company receives consulting services in December that support December’s sales, that expense belongs in December’s books, regardless of when the invoice is paid.
• The Revenue Recognition Principle: revenue is recorded when it is earned and realizable, not when cash arrives. This is the receivables side of the same logic that governs AP on the payables side.

Together, these principles produce financial statements that reflect what actually happened in a given period, giving management, auditors, and investors a more accurate picture of the business than cash-basis records can provide.

Cash Accounting vs Accrual Accounting: The Key Difference

Cash accounting records transactions only when cash moves. It is simpler to maintain and easier to reconcile, which is why small businesses often use it. Accrual accounting records transactions when they are economically incurred, which better reflects the true state of the business but requires more rigorous tracking.

For example, the U.S. Internal Revenue Service (IRS) requires accrual accounting for businesses with average annual gross receipts above $32 million for the prior three-tax-year period. At the same time, the UAE Ministry of Finance requires accrual accounting for taxable entities with annual revenue above AED 3 million (approximately $816,800 USD).

The AP team operates under accrual rules whether or not they have been trained explicitly on what that means for their workflow.

How Accrual Accounting Works in AP Practice

For an AP team, accrual accounting translates into a specific sequence: the obligation is recorded first, the payment comes second. Let’s see how it plays out across some common AP examples.

Scenario 1: Receiving an Invoice Before Paying It

A company receives IT consulting services on November 15. The vendor sends an invoice for $12,000. Payment terms are Net 30, so payment is due December 15.

Under accrual accounting, the expense is recorded on November 15 when the services are received:

When payment is sent on December 15, the liability is cleared:

Under cash accounting however this is entirely different. Unlike accrual-based accounting nothing would have been recorded until December 15. The expense would appear in the books only in December, even though the service was consumed in November. So accrual accounting ensure the expense matches the period it was incurred.

Scenario 2: Accruing Expenses at Period-End When No Invoice Has Arrived

This is the scenario that creates the most work for AP teams. A company receives warehouse services throughout December, but the vendor has not yet submitted their invoice by December 31. Under accrual accounting, the expense must still appear in December’s financial statements.

The AP team creates an accrual entry on December 31 based on the estimated amount:

When the invoice arrives in January, the accrual is reversed and the actual AP entry is made. This reversal process is one of the most time-sensitive and error-prone parts of period-end close for AP teams.

Scenario 3: Prepaid Expenses (Paying Before Receiving)

A company pays $24,000 for an annual software licence in January. Under accrual accounting, this is not an immediate expense. Instead, it is recorded as a prepaid asset and recognized as an expense of $2,000 per month over 12 months. AP records the initial payment, but the expense recognition is spread across the year through monthly journal entries.

This prepaid-to-expense amortization process requires the AP team to maintain records of the original payment, the asset balance, and the monthly expense recognition schedule, adding to the complexity of accrual-based AP management.

Why AP Teams Are at the Center of Accrual Accounting

Accounts payable is the primary operational interface between a business and its supplier obligations. Under accrual accounting, AP is responsible for the accuracy of the liability side of the balance sheet in real time. Every invoice received, every three-way match completed, every accrual estimated, and every period-end reversal posted flows through the AP function.

This gives AP teams an unusual position in the financial close process: they are not just processing payments. They are maintaining the integrity of a portion of the company’s financial statements. Four specific AP responsibilities connect directly to accrual accounting:

• Recording liabilities at the point of obligation: when goods are received or services are delivered, the AP team is responsible for ensuring the corresponding liability is recorded in the correct period. Delays in matching or approval result in liabilities that miss their correct accounting period.
• Estimating accruals for uninvoiced receipts: at period-end, AP must identify all goods and services received for which no invoice has arrived and create accrual entries for them. This requires close coordination with procurement and receiving teams.
• Reversing and reconciling accruals: every accrual created must eventually be reversed when the actual invoice arrives. AP must maintain records of all open accruals and manage the reversal process to avoid double-counting expenses.
• Maintaining an audit-ready payables ledger: under accrual accounting, the AP ledger must show not just what has been paid but what is owed. Auditors review the accuracy of AP accruals as part of the period-end close. An AP ledger that does not reconcile to the general ledger or that contains stale items is a significant audit risk.

The Real Operational Challenges Accrual Accounting Creates for AP Teams

Accrual accounting’s demands and AP’s operational reality frequently collide. The challenge is not conceptual. It is operational. These are the specific friction points where accrual accounting creates the most difficulty for AP practitioners.

Volume and Timing Pressure at Period-End

In 2024, 52% of AP professionals reported spending more than 10 hours per week processing invoices. Under accrual accounting, the period-end close compresses this already heavy workload further: every uninvoiced receipt must be identified, estimated, and posted before the books close. For AP teams running on manual processes, the period-end crunch under accrual accounting is one of the most stressful and error-prone parts of the monthly cycle.

Invoice Processing Delays

For two-thirds of AP teams, invoice processing takes more than five days, according to the ACAPP / Webexpenses Global Report on Accounts Payable Automation Trends. The most commonly cited barrier was too many paper documents (38%), followed by too much manual data entry (28%). Under accrual accounting, a five-day or longer processing window means invoices regularly arrive in the AP system in a different accounting period than the one in which the underlying goods or services were received. This creates period-end mismatches that require manual correction and adjustment.

Accrual Estimation Errors

When no invoice has arrived by period-end, AP teams must estimate the accrual amount. This estimation process depends on purchase order data, receiving records, historical invoice amounts, and vendor patterns. Without accurate, current data from each of these sources, estimates can be materially wrong, leading to either understated liabilities (which overstate profitability in the current period) or overstated liabilities (which depress profitability unnecessarily).

Poor processes are not just an efficiency problem. The IFOL/SAP Concur 2024 Research Report found that stress from poor AP processes was the biggest challenge reported by 64% of respondents, with 41.4% also citing damaged vendor relationships as a consequence. Both of these outcomes are amplified under accrual accounting, where the pressure of period-end close adds additional urgency to every step.

The Fraud and Error Risk Under Accrual Accounting

Accrual accounting’s complexity also creates opportunities for error and fraud. With transactions recorded across multiple periods, with accruals, reversals, and adjustments all in play, the potential for duplicate payments, missed reversals, and fraudulent accrual entries increases. The Association for Financial Professionals 2024 Payments Fraud and Control Survey found that 79% of organizations were victims of payments fraud attacks or attempts in 2024. Accurate accrual records are a core tool for detecting anomalies. When every obligation is documented from the point of incurrence, fraudulent entries or inflated accruals are more visible in the ledger.

At the same time, the payment error rate in most enterprises is typically between 0.1% and 0.4% of total supplier disbursements. While this sounds small, applied to an organization spending hundreds of millions of dollars with suppliers, it represents a meaningful financial exposure that accrual accounting’s detailed record-keeping is designed to surface.

The Global Mandate: Why Accrual Accounting Is the Standard, Not the Exception

For AP professionals wondering whether accrual accounting is truly unavoidable, the answer at scale is yes. The mandate comes from multiple directions: regulatory requirements, accounting standards, and a clear global trend toward accrual-based reporting.

U.S. Federal Government and GAAP

The U.S. federal government uses accrual-basis accounting for its consolidated financial statements, recognizing expenses when incurred rather than when paid. If the U.S. government manages its accounts on an accrual basis, the standard is well-established as the benchmark for serious financial management.

The IRS Threshold

For private-sector businesses, the threshold is regulatory. As the Congressional Research Service documents, the IRS requires accrual accounting for businesses with average annual gross receipts above $25 million. For any business operating at this scale or above, accrual accounting is not optional. It is a legal requirement. The AP team’s processes must be capable of supporting accrual-basis record-keeping regardless of whether every team member fully understands the accounting principles behind it.

The IMF and Global Public Sector Standards

At the international level, the IMF adopted the Government Finance Statistics Manual 2001 (GFSM 2001), which is based on the accrual accounting concept, as the global framework for government finance statistics collection and dissemination, as documented in the IMF’s Technical Notes and Manuals on Transition to Accrual Accounting. This framework governs how governments around the world report their finances, creating a global architecture built on accrual principles.

The Global Adoption Trend

As of 2020, 30% of jurisdictions worldwide reported on a full accrual basis, 40% on a partial accrual basis, and 30% on a cash basis, representing a 6% increase in accrual adoption since 2018, according to the IFAC/CIPFA International Public Sector Financial Accountability (IPSFA) Index. The direction of travel is clear: more jurisdictions, more governments, and more organizations are moving toward full accrual reporting. In the European Union specifically, adoption of accrual accounting was projected to rise from 25% in 2018 to 65% in 2023, according to research published in the IOSR Journal of Economics and Finance.

The same research links accrual accounting adoption in the U.S. to a 0.5% increase in aggregate productivity and a 0.7% increase in aggregate output, suggesting that the discipline required by accrual-based financial management produces measurable economic benefits beyond compliance.

How AP Automation Addresses the Demands of Accrual Accounting

The connection between accrual accounting’s requirements and AP automation’s capabilities is direct. Accrual accounting demands speed, accuracy, and auditability. Manual AP processes produce delays, errors, and limited traceability. Automation closes that gap.

Faster Invoice Capture Means Correct Period Recording

The primary cause of accrual errors in AP is timing. An invoice received on November 29 that is not entered into the system until December 3 creates a period mismatch that must be manually corrected. AI-powered invoice capture processes invoices at the point of receipt, eliminating the processing delay that causes most period-end mismatches.

IBM Research documented that an AI-driven AP system processed approximately 80,000 invoices with 76% automatically processed with low or no manual intervention, demonstrating at scale that automation can maintain the processing speed that accrual accounting’s timing requirements demand.

Three-Way Matching Supports Accurate Liability Recognition

Accrual accounting requires that a liability be recorded when an obligation exists, not just when an invoice arrives. Automated three-way matching, comparing the purchase order, the goods receipt, and the invoice, confirms that goods or services have actually been received and that the obligation is genuine before recording the liability. This confirms the economic substance that accrual accounting is designed to capture.

Automated Accruals for Uninvoiced Receipts

One of the most labor-intensive aspects of accrual accounting for AP teams is creating period-end accruals for goods and services received without a corresponding invoice. Automation platforms that connect goods receipt data with purchase order data can identify uninvoiced receipts automatically and generate accrual entries based on PO prices, eliminating the manual estimation process.

Audit Trails That Support Accrual-Basis Review

Every accrual entry, reversal, and adjustment requires a documented audit trail. Automated AP systems maintain a timestamped record of every transaction, every approval, and every status change, providing the audit-ready documentation that accrual accounting compliance requires without additional manual work.

The Strategic Case for Automation Under Accrual Accounting

In 2024, 88.6% of AP professionals believed that automating invoice management and supplier payments would free up their finance team to focus on more strategic initiatives, according to the IFOL/SAP Concur 2024 Research Report. Under accrual accounting, that strategic capacity matters: AP teams that are not consumed by manual period-end accruals, reversal tracking, and error correction can apply their expertise to vendor relationship management, cash flow optimization, and financial reporting quality.

Despite this recognition, only 7.1% of AP teams currently use AI technologies in spend management processes, with 35.7% considering adoption within the next year. The gap between what AP professionals know they need and what is currently in place represents the clearest opportunity in AP operations today.

Accrual Accounting Best Practices for AP Teams

Whether or not AP automation is in place, the following practices improve the accuracy and efficiency of accrual-based AP management:

• Establish a period-end cut-off date and enforce it: determine the date after which no invoices are posted to the prior period without specific controller approval. This date should be communicated to vendors, procurement, and receiving teams so that everyone understands when goods and services must be confirmed to make the period.
• Maintain a running accrual register: track all open accruals in a central register that shows the vendor, the estimated amount, the period accrued, and the status (open, invoice received, reversed). This register is the basis for period-end accrual reviews and prevents reversals from being missed.
• Connect AP with goods receipt data: uninvoiced accruals can only be accurately estimated if AP knows what has been received. A live connection between the ERP’s goods receipt records and the AP team’s period-end accrual process is the most direct way to reduce estimation error.
• Reconcile the AP sub-ledger to the general ledger monthly: the AP sub-ledger and the GL accounts payable account should always agree. A monthly reconciliation catches errors before they carry forward into subsequent periods where they become harder to trace and correct.
• Document the basis for every period-end accrual estimate: when an accrual is based on an estimate rather than an actual invoice, document the basis: which PO was referenced, what the estimated rate was, and who approved the estimate. This documentation is required for the audit trail and makes reversal simpler when the actual invoice arrives.

How Serina Supports Accrual-Accurate AP

Serina’s AP automation platform is built to deliver the speed, accuracy, and audit trail that accrual accounting demands. By capturing invoices at the point of receipt through AI-powered extraction, matching them to purchase orders and goods receipts through automated three-way matching, and routing approvals through configurable workflows, Serina ensures that every liability is recorded in the correct period with full documentation.

• AI invoice capture at point of receipt: invoices are captured and extracted immediately on arrival, eliminating the processing delays that cause period mismatches. Explore Serina’s AI invoice processing.
• Automated three-way matching: purchase order, goods receipt, and invoice are matched automatically, confirming the economic substance that accrual accounting requires before liability is recorded. Learn about Serina’s three-way matching.
• Configurable approval workflows: every accrual, every invoice, and every adjustment routes through a documented approval chain, providing the audit trail that accrual compliance requires. Explore the invoice approval workflow guide.
• Real-time AP visibility: the Serina dashboard gives AP managers and controllers a live view of all outstanding obligations, open accruals, and payment status, reducing the estimation burden at period-end. Explore Serina’s AP KPIs and reporting.

Contact Serina to discuss your AP environment

Final Thought

Accrual accounting is not an accounting concept that lives in a textbook and stops at the accounting department’s door. It governs the timing, accuracy, and audit trail of every obligation the AP team processes. For AP professionals, understanding accrual accounting is not about becoming an accountant. It is about understanding why precision and timeliness in invoice processing, period-end accruals, and ledger reconciliation matter for the integrity of the financial statements the business depends on.

The organizations that manage accrual-based AP most effectively are the ones that have built systems capable of matching the speed and accuracy the method requires. That is the case for automation not as a technology investment but as an accounting discipline.

Learn how Serina helps AP teams operate at the accuracy level accrual accounting requires.

Frequently Asked Questions

What is the difference between an accrual and an accounts payable entry?

An accounts payable entry is created when an invoice is received and recorded as a specific liability to a specific vendor for a specific amount. An accrual entry is created when an obligation exists but no invoice has yet been received. The accrual captures the estimated amount owed and is reversed when the actual invoice arrives and is posted as a standard AP entry. Both serve the same function under accrual accounting: ensuring that expenses appear in the correct period, whether or not the invoice has arrived.

Can a business choose between cash and accrual accounting?

For businesses with average annual gross receipts above $25 million, U.S. tax law requires accrual accounting. Below this threshold, businesses may generally use the cash method. However, GAAP requires accrual accounting for businesses that issue financial statements to external parties, including lenders, investors, or auditors. In practice, any business that needs to demonstrate its financial position accurately to stakeholders will find accrual accounting necessary even if it is not technically mandated by law.

What happens if an AP team records an invoice in the wrong period?

Recording an invoice in the wrong accounting period understates or overstates expenses in the affected periods, which distorts the income statement, the balance sheet liability position, and any financial ratios based on those figures. In audited financial statements, material period-end errors must be corrected and disclosed. Under accrual accounting, the AP team’s responsibility is to ensure that every obligation is recorded in the period it belongs to, not the period in which it is convenient to process.

How does three-way matching relate to accrual accounting?

Three-way matching, the comparison of purchase order, goods receipt, and vendor invoice, is the operational mechanism through which AP confirms the economic event that accrual accounting requires. Accrual accounting mandates that a liability be recorded when goods or services are received, not when an invoice arrives. Three-way matching proves that goods or services have actually been received and that the vendor’s claim matches the purchase order terms, giving AP the verified data it needs to make an accurate accrual entry.