Accrual versus cash accounting · F01 · Sunflower Intelligence

Before you start

You will be able to

Distinguish the cash basis from the accrual basis and calculate profit under each for the same period.
Apply the revenue recognition principle, including the five-step model of ASC 606 and IFRS 15, to decide when revenue is earned.
Apply the expense recognition principle and explain what “matching” does and does not justify.
Classify a gap between cash and recognition as a deferral or an accrual of revenue or expense.
Reconcile cash-basis profit to accrual-basis net income item by item.
Explain why US GAAP and IFRS financial statements use the accrual basis and where the cash basis is still used.

Review first

The trial balance — You will compare the profit in Lantern’s 31 March trial balance with what the accrual basis requires.
The accounting equation — Unearned revenue, net income and the way revenue and expenses change equity come from there.

Fictional case A fictional coffee business founded by Ana Lim. It starts as a catering and barista-training service, opens its own cafés and an online shop for beans, and plans a canned cold brew.

The idea

Fictional case

On 31 March 2026 Ana Lim asks a simple question: how much did Lantern Coffee Co. make in its first month? Three numbers could answer it. During March customers paid Lantern $6,900 and Lantern paid $5,950 for its running costs, so counting cash, the month made $950. The trial balance from lesson 7 shows revenue of $5,700 and expenses of $3,410: a profit of $2,290. And once the books are brought up to date in lesson 9, March’s net income will be $990. Each figure is arithmetically correct. They differ because they assign revenue and expenses to periods by different rules.

This lesson is about those rules. They decide which period gets the credit for a sale and which period bears a cost, and they explain how a business can be profitable while its bank balance falls, or flush with cash while it is losing money.

Two ways to keep score

Under the cash basis, revenue is recorded when cash is received from a customer and an expense is recorded when cash is paid. Profit on this basis is simply operating receipts minus operating payments for the period. It is easy to keep and easy to check against the bank statement, which is why many households, clubs and very small businesses use it.

Under the accrual basis, revenue is recorded when the business earns it by doing what the customer is paying for, and an expense is recorded when the business uses up a resource or takes on an obligation in running its operations, whenever the cash moves. Lantern has kept accrual records from its first day. That is why the $4,200 conference invoice became revenue on 12 March, before Meridian Partners paid anything, and why Harbor Tech’s $2,400 deposit was recorded as unearned revenue, a liability, not as revenue.

Three of Lantern’s March events on the two bases (fictional)
Event	Cash basis: March	Accrual basis: March	Accrual basis: later months
Conference catered 12 Mar and invoiced at $4,200; $3,000 collected 25 Mar	+3,000	+4,200 revenue	None: collecting the last $1,200 in April isn’t revenue again
Harbor Tech pays $2,400 on 8 Mar for events on 26 Mar, 9 Apr and 23 Apr	+2,400	+800 revenue	+1,600 revenue in April
$1,800 paid on 4 Mar for insurance from March 2026 to February 2027	−1,800	−150 expense	−150 a month for 11 more months (1,650)

Over the life of each event the totals agree: 4,200, 2,400 and 1,800 on both bases. What differs is the month that gets them.

The two bases agree in total; they disagree about timing. Timing matters because financial statements are prepared for periods: a month, a quarter, a year. The time period assumption says a business’s life can be divided into such periods and reported on, and once time is divided, you need a rule for the period to which each revenue and expense belongs.

Deferrals and accruals

Whenever cash moves in one period and the revenue or expense belongs to another, one of the two happens first. If the cash comes first, the item is a deferral: recognition is put off, and until then the balance sheet holds the amount as an asset (a cost paid in advance) or a liability (a payment received in advance). If recognition comes first, the item is an accrual: the revenue or expense is recognised now, and the balance sheet holds a receivable or a payable until the cash settles it.

The timing map: every gap between cash and recognition falls in one of four cells (fictional Lantern examples)
	Cash first: a deferral	Recognition first: an accrual
Revenue	Unearned (deferred) revenue. Harbor Tech’s $2,400 deposit is a liability until Lantern caters the events.	Accrued revenue. A $600 breakfast catered for Pier Nine Studio on 31 March and invoiced on 2 April is a receivable until paid.
Expense	Prepaid expense. The $1,800 insurance policy is an asset that becomes an expense month by month.	Accrued expense. $1,400 of wages earned by the baristas on 16–31 March and paid on 5 April is a liability until paid.

Equipment is a long-lived cost paid (or owed) in advance: its cost is spread over its useful life as depreciation. Lesson 9 records all of these at the end of March.

In depth

The revenue recognition principle

The revenue recognition principle says revenue is recognised when, or as, the business satisfies a promise to a customer by transferring control of a good or service, at the amount it expects to be entitled to in exchange. Each distinct promise in a contract is a performance obligation. In US GAAP the rule is set out in Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers; under IFRS Standards the equivalent is IFRS 15, which has the same title. The core principle of Topic 606 is that:

“…an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
FASB Accounting Standards Codification 606-10-10-2

Both standards turn that principle into five steps. At an introductory level they work as a checklist for any sale:

Identify the contract with the customer: an agreement that creates rights and obligations both sides can enforce.
Identify the performance obligations: the distinct goods or services the business has promised.
Determine the transaction price: the amount the business expects to be entitled to.
Allocate the transaction price to the performance obligations, in proportion to their stand-alone selling prices, which are what each would sell for on its own.
Recognise revenue when, or as, each performance obligation is satisfied.

Run Harbor Tech’s order through the steps. The contract is the agreement for three catered events (step 1). Each event is a separate promise, so there are three performance obligations (step 2). The transaction price is $2,400 (step 3). Each event sells for $800 on its own, so each is allocated $800 (step 4). Lantern satisfies the first obligation by catering the event on 26 March and recognises $800 of revenue that day; the other $1,600 waits for 9 and 23 April (step 5). The cash arrived on 8 March, and that date plays no part in any of the five steps.

A catered event is delivered at a point in time. Other promises are kept over time: a 12-month software subscription, a university term, a gym membership. The customer receives the service continuously, so revenue is recognised progressively, evenly when the service is spread evenly. A software company paid $1,200 in advance for a year’s subscription earns $100 of revenue a month and holds the rest as unearned revenue. Notice what is not a recognition event: signing a contract (step 1 only), sending an invoice, or receiving cash.

The expense recognition principle

The expense recognition principle says expenses are recognised in the period in which they are incurred: when the business uses up an asset or takes on an obligation in running its operations. Usually that is the period whose revenue the cost helped to earn. In practice costs reach the income statement in three ways:

With the revenue they produce. The beans, milk and cups used at the Meridian conference are expenses of March, the month that conference revenue was earned.
Spread over the periods that benefit. The insurance policy protects Lantern for 12 months, so its cost becomes $150 of expense a month; the espresso machine is expected to serve for five years, so its cost is spread over 60 months as depreciation.
Immediately, when no later period clearly benefits. March’s social-media advertising and March’s utilities are expenses of March, even though some customers attracted in March may only buy in April.

Many textbooks call this the matching principle, because each period’s expenses are set against that period’s revenue; OpenStax, for example, describes the expense recognition principle as “also known as the matching principle”. The idea is useful, but it is easy to stretch too far.

Why financial statements use the accrual basis

The FASB and the IASB explain the choice in identical words: accrual accounting shows the effects of transactions and events on a business’s resources and claims in the periods in which those effects occur, even if the cash arrives or leaves in a different period, and that is a better basis for assessing past and future performance than information about cash receipts and payments alone (FASB Concepts Statement No. 8, paragraph OB17; IASB Conceptual Framework, paragraph 1.17). IAS 1 accordingly requires IFRS financial statements, except cash flow information, to be prepared on the accrual basis (from 2027, when IFRS 18 replaces IAS 1, that requirement sits in IAS 8), and financial statements under US GAAP are prepared on the same basis.

The cash basis has two weaknesses for anyone judging performance. It can be moved by timing alone: paying the utilities bill on 1 April instead of 31 March raises March’s cash profit without changing anything about March’s business. And it hides obligations: a cash-basis Lantern would report Harbor Tech’s whole $2,400 deposit as March income although it still owes two events. Accrual accounting doesn’t ignore cash, though. Cash is recorded whenever it moves, and the statement of cash flows, which you will prepare in lesson 10, reports it separately. Readers need both: accrual profit to judge performance, and cash flows to judge whether the business can pay its way.

Where the cash basis is still used

Outside published financial statements the cash basis is common. Individuals, small clubs and many sole traders keep cash records, and tax systems often allow them for some taxpayers. In the United States, for example, IRS Publication 538 explains that corporations other than S corporations, partnerships with such a corporation as a partner, and tax shelters generally can’t use the cash method, but that corporations and partnerships other than tax shelters may still use it if their average annual gross receipts do not exceed a threshold that is indexed for inflation. Rules differ between countries and change over time, so check the current rules where a business operates. Whatever records a small business keeps for tax, anyone judging its performance needs to know about its receivables, payables and unearned revenue, and only accrual figures show them.

Lantern’s March on both bases

Now the opening puzzle can be solved. The table compares, item by item, a cash-basis measure of March with accrual net income after the adjustments you will record in lesson 9. The cash measure counts only operating receipts and payments: Ana’s investment, the bank loan, the $4,000 paid for equipment and the dividend are not revenue or expenses on either basis.

Lantern’s March: cash basis and accrual basis, item by item (fictional)
Item	Cash basis ($)	Accrual basis ($)	Difference in profit ($)
Revenue (receipts from customers)
Meridian conference	3,000	4,200	+1,200
Barista workshop	1,500	1,500	0
Harbor Tech events	2,400	800	−1,600
Pier Nine breakfast	0	600	+600
Total revenue	6,900	7,100	+200
Expenses (payments for operating costs)
Insurance	1,800	150	+1,650
Supplies	1,000	900	+100
Wages	1,600	3,000	−1,400
Rent	1,200	1,200	0
Advertising	350	350	0
Utilities	0	260	−260
Interest	0	50	−50
Depreciation	0	200	−200
Total expenses	5,950	6,110	−160
Profit	950	990	+40

For expenses, the difference in profit is the cash paid minus the expense recognised: paying more than the period used makes cash profit lower. Supplies: $1,000 was paid in March and $900 of supplies were used.

The two totals differ by only $40, but that is a coincidence. Individual gaps run to $1,650 and happen to offset: the insurance paid in advance and the uncollected invoice push accrual profit above the cash figure, while the Harbor Tech deposit and the unpaid wages push it below. Next month several of the same gaps unwind the other way. In April Lantern will earn $1,600 from Harbor Tech without receiving any cash for it, and will pay $1,400 of wages that were March’s expense, so April’s two figures could be far apart.

And the $2,290 in the trial balance? It is accrual accounting that hasn’t finished. It already treats the invoice and the deposit correctly, because those were transactions, but it hasn’t yet recorded what the passage of time and use did during March: insurance expiring, supplies used, equipment wearing, wages and interest building up, one prepaid event delivered and one breakfast not yet invoiced. Those seven adjustments reduce net income by $1,300, from $2,290 to $990, and they are the subject of the next lesson.

Formulas

Cash-basis profit

\text{Cash-basis profit} = \text{Operating receipts} - \text{Operating payments}

$\text{Operating receipts}$: Cash received from customers in the period, whatever period the work belongs to$
$\text{Operating payments}$: Cash paid in the period for running costs (wages, rent, supplies, insurance…)$

Assumes. Owner investment, borrowing, loan repayments, dividends and payments for long-lived assets are left out: they are not revenue or expenses on either basis.

Accrual-basis net income

\text{Net income} = \text{Revenue earned} - \text{Expenses incurred}

$\text{Revenue earned}$: Revenue for performance obligations satisfied in the period, received or not$
$\text{Expenses incurred}$: Resources used up and obligations incurred in the period’s operations, paid or not$

From cash-basis profit to accrual net income

NI = CP + A_R - D_R + D_E - A_E

$NI$: Accrual-basis net income for the period$
$CP$: Cash-basis profit for the period$
$A_R$: Revenue earned this period but not yet received (accrued revenue, unpaid invoices)$
$D_R$: Cash received this period for revenue of later periods (unearned revenue)$
$D_E$: Cash paid this period for costs of later periods (prepayments, paid-for supplies still on hand)$
$A_E$: Expenses of this period not paid from this period’s operating cash (unpaid bills, wages and interest owed, depreciation)$

Assumes. Nothing carried over from earlier periods, as in Lantern’s first month.

In later periods also subtract cash collected for earlier periods’ revenue and add back cash paid for earlier periods’ expenses. Lantern’s March: 950 + 1,800 − 1,600 + 1,750 − 1,910 = 990.

Worked examples

A first example: A hotel’s June on both bases

Fictional figures

Saltmarsh Inn, a fictional 20-room hotel, has these June events. (1) Guests who stayed in June paid $18,000 when they checked out in June. (2) Guests paid $4,000 of deposits in June for stays in July. (3) A wedding party stayed on 28–30 June and was invoiced $6,000, payable in July. (4) June wages were $9,000, of which $7,500 was paid in June and $1,500 on 3 July. (5) On 1 June the inn paid $3,600 for a 12-month property insurance policy. (6) Laundry services used in June were billed at $800 and paid in July. Calculate June’s profit on the cash basis and on the accrual basis.

Cash basis, receipts: count cash received from customers in June, whatever it was for: $18{,}000 + 4{,}000 = 22{,}000$ . The wedding invoice hasn’t been paid, so it is left out.
Cash basis, payments: wages paid of 7,500 plus the insurance premium of 3,600 make 11,100. The unpaid wages and laundry bill are left out. Cash-basis profit is $22{,}000 - 11{,}100 = 10{,}900$ .
Accrual basis, revenue (revenue recognition principle): rooms provided in June are June revenue whether or not paid for: $18{,}000 + 6{,}000 = 24{,}000$ . The deposits are for July stays, so they are unearned revenue, a liability.
Accrual basis, expenses (expense recognition principle): all June wages, 9,000; one month of insurance, $3{,}600 \div 12 = 300$ ; the laundry used in June, 800. Total 10,100, so net income is $24{,}000 - 10{,}100 = 13{,}900$ .
Reconcile: $10{,}900 + 6{,}000 - 4{,}000 + 3{,}300 - 1{,}500 - 800 = 13{,}900$ . That is: plus the wedding earned but not collected, minus deposits collected but not earned, plus insurance paid for July to May, minus wages and laundry owed.

Answer. Cash-basis profit is $10,900; accrual-basis net income is $13,900.

What it means. June’s performance was better than the bank balance suggests, mainly because a $6,000 wedding was delivered but not yet paid for. But $4,000 of the cash in hand belongs to July’s guests: until they stay, the inn owes them rooms or refunds.

A harder example: A battery installation with a monitoring service

Fictional figures

Halden Home Energy, a fictional battery-storage installer, signs a contract on 15 May 2026 to supply and install a home battery system and to monitor it remotely for 24 months from 1 July 2026, all for $10,800. On their own, Halden sells an installed system for $10,000 and two years of monitoring for $2,000. The customer pays a 30% deposit of $3,240 on signing and the balance of $7,560 on 30 June. The battery is installed and handed over on 10 June. Halden’s financial year ends on 31 December. How much revenue should Halden recognise in May, in June and in July–December, and what unearned revenue remains at 31 December 2026?

Step 1, the contract: from 15 May both sides have enforceable rights and obligations. Signing alone creates no revenue; the $3,240 deposit is recorded as cash and unearned revenue.
Step 2, the performance obligations: the installed system and the monitoring service are separate promises (the customer could buy either on its own), so there are two.
Steps 3 and 4, price and allocation: the transaction price is 10,800. Stand-alone prices total $10{,}000 + 2{,}000 = 12{,}000$ , so the system gets $10{,}800 \times 10{,}000 \div 12{,}000 = 9{,}000$ and monitoring $10{,}800 \times 2{,}000 \div 12{,}000 = 1{,}800$ . The $1,200 discount is shared in proportion.
Step 5, recognition: control of the system passes at a point in time, on 10 June, so $9,000 is June revenue. Monitoring is provided evenly over 24 months: $1{,}800 \div 24 = 75$ a month from July, so $6 \times 75 = 450$ in July–December.
Unearned revenue at 31 December: cash received is $3{,}240 + 7{,}560 = 10{,}800$ and revenue recognised is $9{,}000 + 450 = 9{,}450$ , leaving $1{,}350$ , which is 18 months of monitoring at $75.

Answer. Revenue: May $0; June $9,000; July–December $450. Unearned revenue at 31 December 2026: $1,350.

What it means. Revenue follows delivery, not the contract, the invoice or the cash. Had Halden recognised all $10,800 on installation, 2026 revenue would be overstated by $1,350 and the promise to monitor the battery for another 18 months would be missing from its balance sheet.

Applied: a business decision: Is the subscription business collapsing?

Fictional figures

Quillstack, a fictional software start-up, sells 12-month subscriptions for $1,200, paid in advance, with service starting on the day of payment. On 1 January 2026, 100 customers subscribe; on 1 February, 20 more. Running costs are $11,000 a month, paid in the month. The founder saw January’s cash profit of $109,000 and wants to hire two engineers at $8,000 a month each. February’s cash profit was only $13,000, and an investor asks whether the business is collapsing. Measure both months on both bases and advise.

Cash basis: January receipts $100 \times 1{,}200 = 120{,}000$ , profit $120{,}000 - 11{,}000 = 109{,}000$ . February receipts $20 \times 1{,}200 = 24{,}000$ , profit $24{,}000 - 11{,}000 = 13{,}000$ , about 88% lower.
Accrual basis: each subscription is a performance obligation satisfied over 12 months, earning $1{,}200 \div 12 = 100$ a month. January revenue is $100 \times 100 = 10{,}000$ ; February revenue is $120 \times 100 = 12{,}000$ , up 20%. Net income: January $10{,}000 - 11{,}000 = -1{,}000$ , a loss; February $12{,}000 - 11{,}000 = 1{,}000$ .
Unearned revenue at 28 February: January subscribers have 10 months to run, $100 \times 1{,}000 = 100{,}000$ ; February subscribers 11 months, $20 \times 1{,}100 = 22{,}000$ ; 122,000 in all. Cash in hand is $109{,}000 + 13{,}000 = 122{,}000$ : every dollar of it is matched by service still owed.
The hiring plan adds 16,000 a month of expenses. At February’s revenue of 12,000 and costs of $11{,}000 + 16{,}000 = 27{,}000$ , Quillstack would lose 15,000 a month on the accrual basis.

Answer. The business is not collapsing: accrual revenue grew 20% from January to February and the company moved from a $1,000 loss to $1,000 of profit. But it is only breaking even, and two new engineers would turn that into a loss of about $15,000 a month.

What it means. The cash figures overstated January and made February look like a collapse; the accrual figures show a small business growing steadily. The $122,000 in the bank is real and can pay salaries while the company grows, but it is owed back in service, so the hiring decision should rest on how fast accrual revenue is growing, not on the cash collected in a month of heavy sign-ups.

Explore

Common mistakes

“A deposit is revenue: the money is ours.”
The cash is in Lantern’s account, but Lantern owes Harbor Tech two more events or the money back. Until it delivers, the deposit is unearned revenue, a liability. Ask whether the business has done what it was paid for, not whether the money has arrived.
“Revenue is recognised when the contract is signed or the invoice is sent.”
Signing is step 1 of five: it creates a contract, not revenue. Invoicing is paperwork. Revenue is recognised at step 5, when the promised good or service is transferred. A catering contract signed in March for a June event is June revenue.
“Matching lets us carry a cost forward until its revenue arrives.”
A cost can be deferred only if it creates an asset, a resource the business controls with future benefit, such as insurance cover still to come. Advertising that has already run has no such benefit left, even if sales follow later, so it is an expense now. Matching is a result of recognising assets and liabilities correctly, not a reason to invent them.
“Accrual accounting ignores cash.”
Every cash receipt and payment is still recorded when it happens. The accrual basis only refuses to let the date of the cash decide the period of the revenue or expense. Cash is reported in full, separately, in the statement of cash flows.
“Cash and accrual profit came out about the same, so timing doesn’t matter.”
Lantern’s $950 and $990 are close only because gaps of up to $1,650 happen to offset. Compare item by item, not total with total; in April several of the same gaps reverse and the totals are likely to move apart.

Guided practice

Work through these with hints when you need them. Every hint and every worked solution is there to be used.

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On your own

No hints this time. Answer, check, and read the feedback; the solution appears once you have answered or if you ask for it. Your first answers count toward mastery.

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In practice

Ana reads both numbers when she plans April. The accrual figure, $990, tells her what March’s business earned: modest, but positive after every cost of the month, including a share of the espresso machine and of the insurance. The cash figures tell her something different. Most of the $26,650 in the bank came from her own investment and the bank loan, and April already has calls on it: Lantern owes $8,760 to suppliers, $8,000 of it for the espresso machine, and $1,400 of wages, and it must cater two Harbor Tech events for which it has already been paid. Planning with accrual profit alone would miss those payments; planning with cash alone would make March look far richer than it was.

Lenders and investors read accrual statements for the same reason. A business that takes payment in advance, such as an airline selling tickets for future flights, a university collecting tuition before term or a battery installer taking a deposit when the contract is signed, can show a growing bank balance while its obligations grow just as fast. On the accrual basis those receipts sit in unearned revenue until the service is delivered, so a reader can see how much of the cash is owed back in service. For a subscription business that balance is also a sign of revenue still to come, which is why the Quillstack example looked at it before judging the hiring plan.

Timing is also where judgement and pressure meet. Recognising revenue a few days early, or pushing an expense into the next period, changes reported profit without changing the business. The five-step model and the expense recognition principle exist to make those timing decisions consistent and checkable. An auditor testing Lantern’s March would ask for evidence that the Pier Nine breakfast took place on 31 March and not on 2 April, and that the second Harbor Tech event had not yet happened. When you meet a revenue figure in a real report, the first question to ask is the one this lesson began with: earned by doing what, and when?

Knowledge check

Six questions, one attempt each, no hints. Score 80% or more to complete the lesson; you can take it again at any time.

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Summary

The cash basis records revenue when cash is received and expenses when cash is paid; the accrual basis records revenue when it is earned and expenses when they are incurred, whenever the cash moves.
Revenue is recognised when, or as, a performance obligation is satisfied by transferring control of a good or service. ASC 606 and IFRS 15 use five steps: contract, performance obligations, transaction price, allocation, recognition.
Expenses are recognised when incurred: with the revenue they produce, spread over the periods that benefit, or immediately. Matching is a result, never a reason to defer a cost that is not an asset.
A deferral means cash first (unearned revenue, prepaid expense); an accrual means recognition first (accrued revenue, accrued expense). Each leaves an asset or a liability on the balance sheet until the other half happens.
US GAAP and IFRS financial statements use the accrual basis because it shows performance in the period it happens; cash flows are reported separately in the statement of cash flows.
Lantern’s March: cash-basis profit $950, accrual net income $990 after adjustments ($2,290 before them). The totals are close by coincidence; individual items differ by up to $1,650.

Key formulas

Cash-basis profit
Accrual-basis net income
From cash-basis profit to accrual net income

Terms introduced

Cash basis: A way of keeping accounts that records revenue when cash is received and expenses when cash is paid.
Accrual basis: A way of keeping accounts that records revenue when it is earned and expenses when they are incurred, whenever the cash is received or paid. Financial statements under US GAAP and IFRS use it.
Revenue recognition principle: Revenue is recognised when, or as, the business satisfies a performance obligation by transferring control of a promised good or service to the customer, at the amount it expects to be entitled to (ASC 606, IFRS 15).
Expense recognition principle: Expenses are recognised in the period in which they are incurred, usually the period whose revenue they helped to earn. Often called the matching principle.
Performance obligation: A promise in a contract to transfer a distinct good or service to a customer. Revenue is recognised as each one is satisfied, at a point in time or over time.
Deferral: A timing difference in which cash is received or paid before the revenue or expense is recognised. Meanwhile the amount is a liability (unearned revenue) or an asset (prepaid expense).
Accrual: A timing difference in which revenue or an expense is recognised before the cash is received or paid. Meanwhile the amount is a receivable or a payable.

Sources

Franklin, M., Graybeal, P. & Cooper, D. (2019). Principles of Accounting, Volume 1: Financial Accounting, section 4.1, “Explain the Concepts and Guidelines Affecting Adjusting Entries”. OpenStax. openstax.org/books/principles-financial-accounting/pages/4-1…
IFRS Foundation. IFRS 15 Revenue from Contracts with Customers (issued May 2014; effective for annual reporting periods beginning on or after 1 January 2018). Standard summary page. ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-…
Deloitte. Roadmap: Revenue Recognition, section 3.1, “Objective” (quotes ASC 606-10-10-2 and lists the five steps). DART. dart.deloitte.com/USDART/home/codification/revenue/asc606-10…
Financial Accounting Standards Board (2021). Statement of Financial Accounting Concepts No. 8, Conceptual Framework for Financial Reporting, Chapter 1: The Objective of General Purpose Financial Reporting (as amended, December 2021), paragraph OB17. storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%20…
Australian Accounting Standards Board (2019). Conceptual Framework for Financial Reporting, which incorporates the IASB’s Conceptual Framework for Financial Reporting (March 2018); paragraphs 1.17 and 5.5. aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05…
Internal Revenue Service. Publication 538: Accounting Periods and Methods (revised January 2022), “Cash Method”. irs.gov/publications/p538

Before you start

You will be able to

Review first

The idea

Two ways to keep score

Deferrals and accruals

In depth

The revenue recognition principle

The expense recognition principle

Why financial statements use the accrual basis

Where the cash basis is still used

Lantern’s March on both bases

Formulas

Cash-basis profit

Accrual-basis net income

From cash-basis profit to accrual net income

Worked examples

Explore

Common mistakes

“A deposit is revenue: the money is ours.”

“Revenue is recognised when the contract is signed or the invoice is sent.”

“Matching lets us carry a cost forward until its revenue arrives.”

“Accrual accounting ignores cash.”

“Cash and accrual profit came out about the same, so timing doesn’t matter.”

Guided practice

On your own

In practice

Knowledge check

Summary

Key formulas

Terms introduced

Sources