Let’s look a little more closely at accrual accounting.

One underlying principle of accrual accounting is that it matches the income with expenditure.  That is, when you record the income you also record the expenses relating to the earning of the income.

For example, you may receive a government grant of $120,000 that specifies in the funding agreement that it is required to be spent over the 12 months of the year at $10,000 per month for the employment of a project worker.  Under accrual accounting you would record income of $10,000 for each month and then match it against the actual expenditure incurred.  In this example the grant is used to cover the salary and wages of a project worker so the monthly wages are “matched” against this income.

Therefore, and as an example, if no other transactions took place, then under accrual accounting in month one you will have income of $10,000 and expenditure of $10,000.  Under cash accounting the $120,000 would be recorded in month one and would not be “matched” against the salary and wages.  Therefore, under cash accounting for the project, in month one you would have income of $120,000 and expenditure of $10,000 resulting in a $110,000 surplus.  Then for each subsequent month you will only record the $10,000 for salary and wages resulting in a $10,000 deficit in the accounts.

Another example could be that at the end of March or 3 months before the end of the financial year you pay your business insurance premium for 12 months that costs $12,000.  Under cash accounting the full $12,000 would be recorded when the actual payment is banked by the insurance organisation which may be later in April or even May if payment has been made by cheque.  With accrual accounting 3 months or $3,000 will be allocated in the current financial year and $9,000 for the next financial year.  Without getting too technical with accounting principles you would treat the payment as a pre-payment, which would be an asset, and then for each month allocate one twelfth as an expense.

This is why accrual accounting has a longer term view and provides more detail than compared to cash accounting.

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