Two Ways to Count a Year
Can two honest sets of accounts for the same year disagree?
The idea
Accrual accounting records revenue when it is earned; cash accounting records it when the money moves.
In the real world
December work invoiced in December and paid in February appears in different years under each method.
Going deeper
Accrual and cash accounting are both accurate and answer different questions. Accrual matches revenue to the period it was earned, which shows performance; cash records money as it moves, which shows solvency.
The practical consequence is knowing which one you are looking at. An accrual profit and loss can show a strong December that includes revenue arriving in February, which is exactly the information you do not want when deciding whether January payroll clears. Comparing two periods prepared on different bases, which happens more than people expect, produces conclusions that are simply wrong.
Where it stops applying
Which basis you may use for reporting and tax is set by regulation and by size, not by preference. The choice available is usually about internal management accounts rather than statutory ones.
Why it matters
It tells you why two accurate reports on the same business can disagree, and which to use for what.
Try this today
Ask which basis your figures are on before comparing two periods.
Test yourself
Work is done in December, invoiced in December, and paid in February. Which year does the revenue fall in, and which basis tells you whether payroll clears in January?
Show the answer
Accrual puts it in the earlier year, cash in the later one. For January payroll only the cash view helps, because the accrual view has already counted revenue that has not arrived. One shows performance, the other shows survival.
Learn this in the feed Answering from memory, then again days later, is what makes it stick.