Accrual accounting

Revenue is recorded when earned and cost when incurred, so profit and cash diverge by design.

• Accounting

2 ideas that carry it

• FrameworkAccountingVideo located

  Net income and cash flow diverge by design: revenue is recorded when earned, not when paid

  Accrual profit is the economics of a period; cash is the bank account. Every difference is a timing gap that the cash flow statement reconciles.

  The first accounting question in any finance interview, and the foundation for every quality-of-earnings judgement.

  From Accrual Accounting: How it Works & Why it’s #1 · Accounting Stuff

• Case studyAccountingDocumentary

  Revenue recognition and off-balance-sheet vehicles can book profit that never arrives

  Profit is an opinion about the future; cash is a fact. When they diverge for long, find out why.

  Any question about quality of earnings, accrual accounting or how a fraud can pass an audit.

  From Enron: The Smartest Guys in the Room · 2005