§ 01
| Cash Basis | Accrual Basis | |
|---|---|---|
| Records revenue | When cash is received | When earned (goods delivered/services rendered) |
| Records expenses | When cash is paid | When incurred (matched to related revenue) |
| Used by | Small businesses, personal finance | All public companies (required by GAAP) |
| Advantage | Simple, shows actual cash position | More accurate picture of economic reality |
§ 02
Accrual accounting can show a profitable company that is running out of cash. That is why the cash flow statement exists as a cross-check.
§ 03
Look at any company's **Net Income** vs **Operating Cash Flow**. A big gap between them means accrual accounting and cash reality are telling different stories.
§ 04
§ 05
A company records $100M of revenue from a 3-year contract when signed (upfront), but receives the cash over 36 months. Under GAAP, how much should appear as revenue in year 1?
Five questions · AI feedback
Sit with the ideas.
A software company signs a 2-year contract for $240,000, receiving the full payment upfront on January 1. Under accrual accounting, how much revenue should it recognize in Year 1?
Why: