Financial Education

In order to comply with U.S. GAAP and IAS, however, companies must present their income statement on an accrual basis, reporting revenues when earned and expenses when incurred. The timing of when revenues are earned does not necessarily coincide with when cash is received. Likewise, the timing of when expenses are incurred does not always coincide with when the expenses are paid. Instead, the matching principle requires that revenues and their associated expenses are recognized at the same time.

When the recognition of revenue or expense differs from the cash flow timing, it results in an accrual. Common accruals include:

Accounts receivable: results when revenue has been recognized (customer has received the goods or services) but cash has not yet been received

Accounts payable: results when the company has received goods or services for which it has not yet paid

Inventory: results when the company has paid for and received goods that have not yet been resold

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis

See also:

Cash Flow Statement – The Indirect Method

The Cash Method of Accounting

Cash Flow from Operating Activities

Cumulative Effect of Accounting Changes

Inventory Accounting: Differences Between U.S. GAAP and International Standards