Accrual vs Cash Accounting
Two methods for recording transactions — accrual recognises when earned/incurred, cash when money moves.
Cash accounting records transactions when cash is received or paid. Accrual accounting records them when the economic event occurs — when revenue is earned or an expense is incurred — regardless of when cash changes hands.
Cash accounting is simpler and shows actual cash position, but it can distort financial performance. A company that invoices $100,000 in December but collects in January shows zero December revenue under cash accounting. Accrual accounting captures the $100,000 as December revenue, reflecting economic reality.
Most businesses above a certain size are required to use accrual accounting for tax and financial reporting purposes. IFRS, US GAAP, and most national standards require accrual-based financial statements.
The practical challenge with accrual accounting is that it creates a gap between profit and cash. A company can be profitable on an accrual basis while running out of cash — because revenue is recognised before customers pay, and expenses are recorded before suppliers are paid. This is why the cash flow statement exists alongside the P&L.
Related Terms
The accounting rules for when and how revenue is recorded in the financial statements.
A report showing how cash moves in and out of a business across operating, investing, and financing activities.
A financial report summarising revenue, costs, and profit over a specific period.
Money owed to a company by its customers — a current asset that directly affects cash flow.
Further Reading
Not sure what financial reports your Malaysian business needs? This simple guide explains P&L, balance sheets, and cash flow statements in plain language.
Revenue looks good but cash is always tight? Learn why Malaysian SMEs face cash flow problems and 5 proven strategies to fix them for good.