Lessons · Accounting · accrual versus cash
Accrual versus cash: when does it count?
Under cash accounting a sale or a cost counts when the money moves. Under accrual accounting it counts when it is earned or used up, whichever month the cash happens to move in.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
A job is finished on 20 December and the customer pays on 12 January. Which year's profit is it? The tax return, the year-end bonus and the bank's view of the business all hang on the answer, and accrual gives the one that describes what actually happened.
How to think about it
Ask when the work was done or the thing was used, not when the money moved. Record it then. If the cash comes later, a receivable or a payable holds the gap.
Worked example
Job finished 20 Dec, invoiced 3,000, paid 12 JanOne job, two dates.
Cash basis: revenue in January, when the money arrivedSimple, and it puts December's work in the wrong year.
Accrual basis, 20 Dec: Dr Accounts receivable 3,000 / Cr Sales revenue 3,000Earned in December, so December's revenue. The customer owes it.
12 Jan: Dr Cash 3,000 / Cr Accounts receivable 3,000The cash arrives and settles the receivable. No revenue in January from this job.
Your turn
Under accrual accounting, a 400 bill for December's electricity, paid in January, is an expense of which month? Write it.
December electricity, 400 → expense of
Solve one, graded on the server
The trap
Thinking profit is cash in minus cash out. A month with big collections from old invoices and no new work looks wonderful on a cash basis and is a warning on an accrual one.