Course · Act I: How a Business Works · Chapter 4
Accrual accounting
Why profit and cash differ: cash vs. accrual accounting, the matching principle, accounts receivable, deferred revenue and prepaid expenses.
Key terms
- Accrual accounting
- Revenue when earned, expenses when incurred. Required for US public companies (GAAP).
- Matching principle
- Expenses are recorded in the same period as the revenue they help produce.
- Accounts receivable
- Money customers owe the business. An asset.
- Deferred revenue
- Cash received for work not done yet. A liability.
- Prepaid expense
- Cash paid in advance for something not used up yet, like insurance. An asset.
“Profit Isn’t Cash” is part of the full course: 6 puzzles on accrual accounting, with a story that carries through all five acts. Try this act’s free chapter, “Revenue, Costs, Profit”, first.