> ## Documentation Index
> Fetch the complete documentation index at: https://docs.lerian.studio/llms.txt
> Use this file to discover all available pages before exploring further.
# Accrual vs. cash accounting
> Why revenue isn't always money in the bank, and why profit isn't the same as cash. The difference between accrual and cash accounting, explained in plain language.
Here's a question that quietly confuses almost every beginner: **when does a sale count?** The moment you agree to it and send the bill โ or the moment the money actually lands in your account? Your answer decides whether you're doing **accrual** or **cash** accounting, and it changes how every report reads.
## Two moments, not one
***
Every sale really has *two* moments:
```mermaid theme={null}
flowchart LR
M1["๐ Moment 1
Work done ยท Invoice sent
March"]:::moment
M2["๐ต Moment 2
Cash received
May"]:::moment
M1 -->|"time passes"| M2
ACC(["Accrual records the sale here"]):::accrual
CASH(["Cash records the sale here"]):::cash
ACC -.-> M1
CASH -.-> M2
classDef moment fill:#eef2ff,stroke:#4f46e5,color:#312e81
classDef accrual fill:#dcfce7,stroke:#16a34a,color:#14532d
classDef cash fill:#fef3c7,stroke:#d97706,color:#78350f
```
* The moment you **earn** it โ you deliver the goods, finish the work, send the invoice.
* The moment you **get paid** โ the cash actually arrives.
Sometimes these happen together (you buy coffee, you pay at the counter). Often they don't โ you finish a job in March but the customer pays in May. The two methods simply disagree about which moment to record.
## Cash accounting โ record when money moves
***
**Cash accounting** is the simple one: you record a transaction **only when the cash actually changes hands**. Money in the account? Write it down. Money out? Write it down. No money moved? Nothing to record yet.
It works like your personal bank statement. You don't note that a friend *promised* to pay you back โ you note it when they actually do. Small businesses like it because it's easy and it mirrors the bank balance you can see.
The catch: it can mislead you about timing. Do \$50,000 of work in December but get paid in January, and cash accounting says December earned **nothing**. That's tidy for taxes but a poor picture of what the business actually did.
## Accrual accounting โ record when it's earned
***
**Accrual accounting** records a transaction **when it's earned or incurred โ not when the cash moves.** Finish the work and send the invoice? That's revenue *now*, even if payment is weeks away. Receive a bill for electricity you've already used? That's an expense *now*, even if you pay it later.
It captures *promises*, not just cash:
* Money customers owe you (but haven't paid) is recorded as revenue and as an asset โ **accounts receivable**.
* Bills you owe (but haven't paid) are recorded as expenses and as a liability โ **accounts payable**.
This gives a truer picture of how the business is *really* doing in a period, because it matches the income to the work that earned it. That's why larger businesses โ and the rules they answer to โ use it.
| | **Cash accounting** | **Accrual accounting** |
| ------------------------- | ---------------------------- | --------------------------------- |
| **Records revenue when** | Cash arrives | Work is done / invoice sent |
| **Records expenses when** | Cash is paid | Bill is incurred |
| **Shows you** | What's in the bank | What you've really earned and owe |
| **Best for** | Simplicity, small operations | An accurate picture over time |
Here's that same job made concrete โ **\$50,000 of work done in December, paid in January** โ booked under each method:
| The \$50,000 job | December *(work done)* | January *(customer pays)* |
| -------------------------------------- | ---------------------- | ------------------------- |
| **Cash accounting** records revenue | \$0 | \$50,000 |
| **Accrual accounting** records revenue | \$50,000 | โ *(cash just arrives)* |
Same sale, same \$50,000 โ but the methods book it in different months. Accrual ties the revenue to the **work** in December; cash waits for the **money** in January.
## Why revenue isn't "money in the bank"
***
This is the part that catches people out. Under accrual accounting, **revenue means money earned โ not money received.** You can book \$10,000 of revenue this month and have **none of it** in your account yet, because the customers haven't paid.
So when you read an [Income Statement](/en/fundamentals/accounting/financial-statements) and see revenue, don't picture a full bank account. Picture *work that has been done and billed*. The cash may already be here, may be arriving next month, or may never arrive at all if someone fails to pay.
## Why profit isn't cash
***
The same gap explains accounting's most famous head-scratcher: **a profitable business can still run out of cash.**
Profit is revenue minus expenses โ and under accrual, both can include things where no cash has moved yet. So your Income Statement can show a healthy profit while your bank account runs dry, simply because customers are slow to pay. The reverse happens too: you can have plenty of cash (a big upfront payment) yet little profit.
That's exactly why there are two different reports. The Income Statement shows **profit**; the [Cash Flow Statement](/en/fundamentals/accounting/financial-statements) shows the **actual cash**. As the saying goes: *profit is an opinion, cash is a fact.* You need both to understand a business.
## In short
***
* **Cash accounting** records money only when it changes hands; **accrual accounting** records it when it's earned or incurred, even before the cash moves.
* Under accrual, **revenue means "earned," not "in the bank"** โ so an Income Statement reflects work done and billed, not your account balance.
* Because of that gap, **profit and cash are not the same thing** โ a profitable business can still be short of cash, which is why the profit and cash-flow reports are kept separate.
**Next up**
You now know every piece. See how they run together, period after period, in [The accounting cycle](/en/fundamentals/accounting/accounting-cycle).