accrual vs cash

Accrual vs Cash Accounting

Two ways to record transactions: accrual records revenue and expenses when they're earned or incurred; cash records them when money actually moves.

When you'd see it: Anywhere the books don't match the bank account. Most companies of any size report on accrual basis because it shows the real economics of a period — but they also track cash separately to make sure they don't run out. The mismatch between the two is what the cash flow statement reconciles.

Why it matters: Accrual is the truth about economic activity; cash is the truth about solvency. A business that signs a $1M contract in December books $1M of accrual revenue even if no cash arrives until February — which means a great accrual quarter can hide a terrible cash quarter. Reading both is how you avoid being fooled by either.

Common mistakes: Assuming accrual is more "correct" than cash. Both are legitimate views of the same business. Tax authorities, lenders, and investors look at different angles for different reasons. The error is reading only one and ignoring what the other is saying.

Related GAAP, P&L