Case study: cash vs accrual
Who asked: Laurel Stone Studio's owner.
Question: Why does March profit differ from the cash result?
Data: Prior invoice, current work, rent payment, prepayment and utility bill.
Done: Both basis reports are read and the final cash result is checked.
Laurel Stone Studio's owner sees customer cash receipts but cannot explain March's profit. Compare accrual and cash reporting on the same books. Accrual reporting follows when work is earned and costs are incurred. Cash reporting follows the collections and payments represented by the transactions in this exercise. These are management training conventions, not a determination of tax eligibility.
March includes an unpaid earned invoice, collection of a February invoice, March rent paid now, rent prepaid for April and an unpaid March utility bill. None can be understood from the ending bank balance alone. Record the source events first, then read each report basis. The final checked answer states the difference between the two measures using the same period.
An unpaid March invoice belongs in March accrual revenue; its later collection belongs in cash revenue.
Explain why the same books produce different cash and accrual profit.