# Cash, accrual and cut-off

> Cash accounting records when money moves. Accrual records when value moves. Every hard question in the rest of the course lives in the gap between the two.

Source: https://lopifi.com/learn/cash-versus-accrual
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

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**What is the difference between cash and accrual accounting?** Cash accounting records when money moves. Accrual records when value moves. Every hard question in the rest of the course lives in the gap between the two.

[Cash basis](https://lopifi.com/md/glossary/cash-basis) says: record it when the money moves. It is simple, it is what a bank statement gives you for free, and it cannot describe any business that gives or receives credit — which is every business with customers or suppliers on terms. It is also not GAAP.

[Accrual basis](https://lopifi.com/md/glossary/accrual-basis) says: record revenue when it is earned and expense when it is incurred, whatever the cash does. It is more work and it is the only basis that answers *did we make money last month*.

| Event | Cash basis | Accrual basis |
| --- | --- | --- |
| Invoiced a customer $22,000 on the 15th, collected $14,000 | $14,000 of revenue | $22,000 of revenue; $8,000 receivable |
| Took $3,000 for October delivery | $3,000 of revenue | No revenue; a $3,000 liability |
| Used $450 of power, no bill yet | No expense | $450 of expense; a $450 liability |
| Paid $7,200 for a year of insurance | $7,200 of expense | $600 of expense; $6,600 asset |

The same four September events, on both bases.

The idea underneath is usually called the [matching principle](https://lopifi.com/md/glossary/matching-principle): a cost is reported in the same period as the revenue it helped produce. That is why the goods Northwind sold on the 8th cost $5,200 *in September* even though $6,000 of the supplier's bill is still unpaid at month end. Strictly, the current Concepts Statements treat matching as a result rather than a rule — record every asset and liability correctly and the cost of a sale lands beside its revenue on its own. Costs that serve many periods, like the van, are not matched to particular sales at all: they are *allocated* over the periods they serve, $500 a month for 48 months rather than $24,000 on the day it was bought.

— [CON 8, Introduction — as amended by Ch. 4, App. A (carrying forward CON 6, ¶139)](https://www.fasb.org/concepts-statements), What accrual accounting is for

One caution, because it costs people money: this is a financial-reporting rule, not a tax rule. The IRS has its own definitions of the cash and accrual methods and its own rules about which one a business may use. A company can be required to file on one basis and report to its investors on another — those are two questions, and they are answered by two different books.

— [IRS Publication 538 (rev. 01/2022)](https://www.irs.gov/publications/p538), Accounting Periods and Methods — cash and accrual

## Cut-off is where the real errors are

[Cut-off](https://lopifi.com/md/glossary/cutoff) is the boundary question: does this belong to September or October? It sounds procedural and it is one of the most common sources of misstatement — auditors test it on every engagement — because the pressure is always in one direction: an invoice dated 1 October for goods delivered 29 September is September's revenue, and it will not feel like it to whoever is reading the invoice date.

> **The three cut-off tests.** For revenue: when were the goods delivered or the service performed? For expenses: when was the benefit consumed? For both: what does the supporting document say happened, not what does its date say?

*[Interactive figure: accrual vs cash]*

JE-12: $3,000 banked in September for goods October delivers. Cash basis would call it September revenue; accrual holds it as deferred revenue until the delivery earns it. Same total, different month — and at cut-off the month is the whole question.

**Check yourself.** Northwind delivers goods to a customer on 29 September and issues the invoice on 2 October. Which period earns the revenue?

- October — that is the invoice date. — The invoice date is an administrative fact. It is evidence about the transaction, not the transaction.

- September — the goods were delivered in September. — Revenue is earned when control of the goods passes to the customer — here, on delivery. The September books need an entry for it even though no invoice existed on the 30th: revenue, against an [[unbilled-receivable|unbilled receivable]].

- Split between them. — There is one delivery and one performance obligation, satisfied on one date.

> **Accrual accounting is entirely about the gap between when value moves and when cash moves. Every adjusting entry in the next lesson exists to close one of those gaps.**

- **Lesson:** 8 of 13 — 9 min
- **Terms taught:** [Accrual basis](https://lopifi.com/md/glossary/accrual-basis), [Cash basis](https://lopifi.com/md/glossary/cash-basis), [Matching principle](https://lopifi.com/md/glossary/matching-principle), [Cutoff](https://lopifi.com/md/glossary/cutoff), [Period](https://lopifi.com/md/glossary/period), [Basis](https://lopifi.com/md/glossary/basis), [Deferred revenue](https://lopifi.com/md/glossary/deferred-revenue), [Prepaid expense](https://lopifi.com/md/glossary/prepaid-expense), [Unbilled receivable](https://lopifi.com/md/glossary/unbilled-receivable)
- **Previous:** [The trial balance](https://lopifi.com/md/learn/the-trial-balance)
- **Next:** [Adjusting entries](https://lopifi.com/md/learn/adjusting-entries)
- **The course:** https://lopifi.com/learn