accrual accounting

Also called: accrual basis

Recording revenue when it is earned and costs when they are incurred, whatever the date money moves. The P&L is built this way; the bank statement isn't.

Accrual accounting records revenue when it is earned and costs when they are incurred, whatever day the money moves. A lesson taught in May is May revenue, even if it was paid for in March. A tutor's lesson on 28 May is a May cost, even if the payout goes out on 5 June. The P&L is built this way; a bank statement, which shows only the day money moves, is the cash basis.

The two part in four ways. Cash before revenue: a customer prepays. Revenue before cash: a client pays an invoice weeks after the work. Cost before cash: a supplier or provider is paid later. Cash before cost: equipment is paid for at once and reaches the P&L over years as depreciation. Each of them can be large or small depending on the month.

Over several years profit and cash end up close; in any single month they can point in opposite directions. That's why accrual profit answers "does the business work?" and the cash balance answers "can it pay its bills on time?". A company needs both on the same page.

Example

Two months of Klasna in 2026, in UAH:

	March	May
Operating profit	329,884	591,348
Families paid for packages	6,279,600	4,802,300
Lessons delivered, at their price	4,868,640	6,002,880
Net cash flow	+1,705,570	−579,217.50

That year Klasna paid tutors, salaries and other costs in the month they were incurred, and the payment provider kept 2.5% of every payment. So the only gap was prepayments: March 329,884 + 0.975 × (6,279,600 − 4,868,640) = 329,884 + 1,375,686 = 1,705,570. May 591,348 + 0.975 × (4,802,300 − 6,002,880) = 591,348 − 1,170,565.50 = −579,217.50. The more profitable month shrank the bank: families were using the exam packages they had bought in spring.

Common mistakes

Asking the P&L how much money there is. Open the bank or the cash plan.
Judging a month by cash alone. A loss-making month can fill the bank with prepayments that are still owed in service.
Booking revenue when the invoice is paid. Under accrual it counts when the work is done.
Assuming the gap is small. In a prepaid, seasonal business it can be bigger than the profit itself.

Learn it in the course

Profit is not cash: net income vs cash flow · Net income vs cash flow, month by month: how accruals, prepayments, invoices and equipment make the P&L and the bank disagree, and how to get from one to the other.