Accrual vs cash accounting
Cash accounting: record it when money moves. Simple, and how most people think.
Accrual accounting: record revenue when it is EARNED and expenses when they are INCURRED, regardless of when cash moves. This is what public companies must use.
Why the difference matters to an investor: a company can book revenue on a signed contract long before collecting a penny. That is legitimate — and it is also where the gap between reported profit and real cash opens up.
Where to look:
• Accounts receivable growing faster than revenue — sales booked but not collected
• Deferred revenue — cash collected for work not yet done. Rising deferred revenue is usually a good sign.
• Accruals ratio — the gap between net income and cash flow
Chart: steady recognised revenue, lumpy actual cash.