Planning & reporting
Accrual vs cash accounting
Accrual accounting records revenue when it is earned and expenses when they are incurred; cash accounting records them only when money actually comes in or goes out.
Under accrual, an invoice counts in the period the work is done and the bill in the period the cost is incurred; under cash, each counts in the period it is paid.
Worked example
| March | you finish a job and invoice $10,000; the customer pays in April |
| March | a supplier bills you $2,000 for the job; you pay it in April |
Accrual: $8,000 profit in March. Cash: $0 in March and $8,000 in April.
Why it matters
Accrual accounting matches revenue with the costs of earning it, so it shows how the business is really performing. Cash accounting shows what is in the bank. A profitable business can still run out of cash, which is why you need to understand both.
Common mistakes
Where it misleads
Reading accrual profit as cash available to spend, when customers may not have paid yet.
Comparing periods prepared on different bases, which creates swings that are not real.
Recording a customer’s advance payment as revenue when it arrives, rather than when the work is delivered.
Related terms
Keep reading
- Operating cash flowOperating cash flow is the cash a business’s normal operations bring in or use in a period, before investing and financing activity.
- Accounts receivable aging (AR aging)An accounts receivable aging report groups unpaid customer invoices by how long they are past due, so you can see which money is at risk of never arriving.
- Working capitalWorking capital is the money tied up in running the business day to day: current assets such as cash, receivables and inventory, minus the current liabilities due within a year.
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