Accrual basis versus cash basis
The difference between when an event happened and when cash moved. That difference alone answers most of the "why is profit high and the bank account empty?" questions.
Built forAn accountant who needs a concise treatment that can be applied and traced
When you need it
The difference between when an event happened and when cash moved. That difference alone answers most of the "why is profit high and the bank account empty?" questions.
The decision it supports
Start with “What each basis measures”, then use the explanation to choose the next treatment or check.
What you receive
Work note: Accrual basis versus cash basis
A structured explanation, every official rate with source and review date, then a direct path to a lesson, tool or track.
An example you can inspect
Apply the decision: What each basis measures
The cash basis records when cash moves: you collected, so you recorded revenue; you paid, so you recorded an expense. Simple — but it measures liquidity rather than performance.
Continue the workflow
- Lecture: accruals and prepaymentsAvailable now
- Tool: cash flow bridgeAvailable now
What each basis measures
The cash basis records when cash moves: you collected, so you recorded revenue; you paid, so you recorded an expense. Simple — but it measures liquidity rather than performance.
The accrual basis records when the economic event occurs: you delivered the service so revenue is earned even unpaid, and you consumed the electricity so the cost occurred even before the bill arrived. This is the basis the statements are prepared on.
Why profit is not cash
A business that sold a million on credit and spent seven hundred thousand in cash shows a profit of three hundred thousand and cash of negative seven hundred thousand. Both numbers are right at once, because they measure two different things.
The cash flow statement is the bridge between them: it starts from profit and walks it back to cash by adjusting for what never passed through cash — depreciation, the movement in receivables, and the movement in inventory.