Reading the accounts
Accrual accounting
Recording revenue and costs when they are earned or incurred, rather than when cash moves.
How it works
Accrual accounting gives a truer picture of a period’s activity than cash accounting does, which is why it is the standard.
It also introduces judgement at every point, and the gap between accrual profit and cash flow is where most accounting problems live.
Where it misleads people
A large and growing gap between net income and operating cash flow — a high accrual ratio — has been shown to predict weaker future returns. It is a cheap check almost nobody performs.
Related terms
- Operating cash flowThe cash a company actually generated from running its business.
- Net incomeWhat is left after every cost, including interest and tax — the profit belonging to shareholders.
- Cash flow statementThe statement tracking actual cash moving in and out, split into operating, investing and financing.
- Accounts receivableMoney customers owe for goods or services already delivered.
More in Reading the accounts
- Adjusted earnings
- Assets
- Writedown
- Audit opinion
- Working capital
- Balance sheet
- Tangible book value
- Book value
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.