Accrual basis vs cash basis
Objective: Compute revenue and expenses under cash and accrual bases.
Recommended first: How transactions affect the equation
Under the cash basis, revenue is recorded when cash is received and expenses when cash is paid. Under the accrual basis, revenue is recorded when earned and expenses when incurred, regardless of cash timing.
This course uses the accrual basis because it matches revenue with the costs of earning it. Very small businesses sometimes use cash basis for simplicity; tax rules on which basis is allowed vary and are outside this course.
Seeing both bases side by side shows why accrual accounting is used for most financial reporting: it ties results to activity. A business that collects a large advance under the cash basis looks profitable in that month even though no work was done. Under accrual, the advance waits as a liability until earned.
Check your work
- For each item, has it been earned or incurred?
- For cash basis, has money moved?
- Did you avoid mixing the two bases?
Work done and paid $2,000; work on account $1,000; advance for next month $500. Accrual revenue $3,000; cash revenue $2,500.
| Account | Debit | Credit |
|---|---|---|
| Accrual revenue | $3,000.00 |
Common mistakes
✗ Mixing bases in one set of books.
✓ Pick one basis and apply it consistently.
Guided practice
Use hints freely here.
Item 1 of 1
Revenue: cash basis vs accrual basis
In March a business (1) performed and was paid for $3,400.00 of services, (2) performed $1,100.00 of services on account, (3) received $1,100.00 for services to be done in April, and (4) collected $1,500.00 for work done in February. Compute March revenue under each basis.
Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 2
Expenses: cash basis vs accrual basis
In June a business (1) used and paid for $1,300.00 of services, (2) incurred $450.00 of wages to be paid in July, (3) prepaid $1,400.00 for insurance covering July–December, and (4) paid $500.00 of May's utility bill. Compute June expenses under each basis.
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Key terms
- Accrual basis
- Recording revenue when earned and expenses when incurred.
- Cash basis
- Recording revenue and expenses when cash is received or paid.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
- IRS Publication 583, Starting a Business and Keeping Records (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.