Accrual vs cash accounting: the difference in monthly reporting, with one month worked both ways

Accrual vs cash accounting is a question of timing. Accrual accounting records revenue when it is earned and expenses when they are incurred, whatever the payment date; cash accounting records them only when cash comes in or goes out. The same March can therefore show $35,000 of profit on an accrual basis and $31,000 on a cash basis, from the same seven transactions.

The difference in one line

Accruals match each cost to the period whose revenue it helped earn; cash records the bank statement. In the IRS's words in Publication 538, "the purpose of an accrual method of accounting is to match income and expenses in the correct year": income counts when "all events have occurred which fix your right to receive the income and you can determine the amount with reasonable accuracy." Under the cash method, income counts when it is received and expenses when they are paid.

One March, both ways

One company, March 2026. Each row shows what the transaction does to March profit under each method.

Accrual revenue is 84,000 + 46,000 = 130,000 against costs of 52,000 + 38,000 + 2,000 + 3,000 = 95,000. Cash receipts are 61,000 + 46,000 = 107,000 against payments of 52,000 + 24,000 = 76,000.

Four rows differ. The April-paid invoices are March revenue on accruals and nothing on cash. The February collections are cash in March but were February's revenue. The insurance covers twelve months, so accruals charge one twelfth, 24,000 / 12 = 2,000, and cash charges all of it on March 1. The supplier bill and the utilities belong to March but are paid later.

The reconciliation between the two

The gap between the two profits is the movement in four balance sheet lines. That is the check, and it must close to zero:

Accrual profit = Cash profit + Increase in receivables − Increase in payables and accruals + Increase in prepaid expenses − Increase in deferred revenue

In Excel, with each movement in a named cell:

=ROUND(Accrual-(Cash+dAR-dAP+dPrepay-dDeferred),2)=0

It returns TRUE when the two profits reconcile. The same movements drive the indirect cash flow statement, which starts from accrual profit and works back to cash. Receivables grew 23,000 here because March invoices are not yet paid; payment terms compliance and days sales outstanding measure whether that growth is the terms or late payers.

Why management reporting uses accruals

Matching. March's salaries, materials and utilities sit against March's revenue. On cash, March carried a whole year of insurance and none of its materials, so the margin says nothing about how March traded.

Comparability. Accrual months can be compared with each other and with the budget. Cash months swing with payment runs, quarterly bills and when customers happen to pay.

It is required. US GAAP is accrual-based: the FASB's Concepts Statement No. 8 explains that accrual accounting shows the effects of transactions in the periods they occur, even when the cash moves in a different period. And the SEC's Regulation S-X Rule 4-01 says financial statements filed with it "which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate." IFRS is accrual-based too.

Cash still matters, which is why it gets its own statement. As the SEC's Beginners' Guide to Financial Statements puts it, "while an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash."

Who may use cash accounting

This is a tax question, not a reporting one. Under Internal Revenue Code section 448, a C corporation, a partnership with a C corporation partner, or a tax shelter may not use the cash method, unless it meets the gross receipts test of section 448(c). Publication 538 sets the test as average annual gross receipts for the three prior tax years at or below a threshold that is indexed for inflation. For tax years beginning in 2026, Rev. Proc. 2025-32 sets it at $32,000,000. A business that fails the test "must change to an accrual method of accounting" and file Form 3115 to request the change.

Form 3115 is how a business asks to "request a change in either: an overall method of accounting or the accounting treatment of any item." Section 448 does not restrict S corporations, so many keep the cash method for tax; any US GAAP statements they prepare still use accruals.

The month-end entries that close the gap

Four entries turn a cash-based ledger into an accrual one:

Accrued expenses are reversed when the invoice arrives, so April does not count the utilities twice. Where the cut falls on a 4-4-5 or retail calendar is covered in fiscal calendars and period cuts.

Where it goes wrong

• Cash figures beside an accrual budget. A board deck with cash-basis actuals against an accrual budget turns every timing difference into a variance.
• No accrual for bills not yet received. Costs land in the month the invoice arrives, so one month looks cheap and the next looks expensive.
• Annual costs expensed when paid. Insurance and software licenses belong to the months they cover, not to the month of the payment.
• Revenue booked at invoice when delivery comes later. Under ASC 606 (and IFRS 15), revenue follows the satisfaction of the performance obligation, not the invoice date. Bookings, billings and revenue separates the three timings.
• Judging cash from accrual profit. March made $35,000 on accruals while receivables grew $23,000; a profitable month can still drain cash.

A monthly reporting package that is right on day one

Covirage takes the ledger export as posted, accruals included, and its tools compute the monthly figures and the working-capital movements that reconcile profit to cash; the external AI model explains them without doing any of the sums. See FP&A reporting for the monthly reporting package from your ledger export, reconciled on day one. For the month-end steps that post the accruals, see the month-end close checklist, and to project cash from the same movements, see cash flow forecast.