AI Tutor
Imagine you design and deliver 10,000worthofcustomlaptopsinDecember,butyourclientdoesn′tpaytheinvoiceuntilJanuary.Didyourbusinessmakethat10,000 worth of custom laptops in December, but your client doesn't pay the invoice until January. Did your business make that 10,000 in December or in January?
If you only track physical cash entering your bank account, your December financial results look empty while January looks artificially rich.
The accruals concept (also called the matching principle) states that revenues and expenses must be recognized in the period they are earned or incurred, regardless of when cash is paid or received.
During the 19th-century Industrial Revolution, massive rail companies realized that pure cash tracking distorted performance over multi-year projects — leading directly to the standardized accrual rules we use today.
How do we systematically classify every transaction where cash timing and service timing disagree?

The Four Timing Adjustments

Every timing difference in financial reporting falls into one of four distinct categories across revenues and expenses.
A prepaid expense is an asset representing cash paid in advance for goods or services yet to be consumed, such as paying annual rent upfront.
An accrued expense is a current liability representing costs already consumed during the period for which no invoice or cash payment has yet been made.
How do these adjustments change the numbers we actually report on the Income Statement at year-end?

Worked Example: Expense Matching