The same year, recorded two ways
Cash accounting records an event when money moves. Accrual accounting records it when the event happens. This lesson puts the two side by side on one small contract, then looks at a real company that bills its customers before it has delivered what they paid for.
- Level
- Beginner
- Reading time
- About 23 minutes
- Know this first
- Cash vs profit
By the end you will be able to:
- state the difference between cash basis and accrual basis in one sentence each
- work out the revenue and expense a contract produces each month under both methods
- explain deferred revenue and prepaid expenses and why they appear on a balance sheet
- read a company's billings, revenue and deferred revenue together
Same event, two dates
Cash accounting records income when money arrives and expenses when money leaves. Accrual accounting records income when it is earned and an expense when it is incurred, whatever date the money moves.
The cash vs profit lesson showed what this does to profit. This lesson looks at the rules behind it, so you can predict the gap instead of only noticing it. Two ideas carry most of the weight. Income is recorded when the work is done, not when the payment lands. And a cost is recorded in the same period as the income it helped to earn.
In India a company has to keep its books on the accrual basis. Section 128 of the Companies Act, 2013 requires it, and the revenue standard, Ind AS 115, sets the rule: revenue is recorded when the promised goods or services are transferred to the customer. Cash accounting is mostly seen in very small businesses and personal finance, where the bank balance is the whole story.
Try it with a contract
Back to Meena. On 1 April a school pays her ₹1,20,000 up front for a twelve-month supply of stationery. On the same day she pays ₹24,000 for a year of shop insurance. Each month she delivers supplies that cost her ₹6,000. Move the slider to see how each method records the months that have passed.
After 3 months, cash accounting shows a profit of ₹78,000 and accrual accounting shows ₹6,000. Cash accounting counted the whole ₹1,20,000 on day one. Accrual accounting counts only what Meena has delivered, so ₹90,000 is carried as deferred revenue and ₹18,000 of insurance as prepaid.
Slide to month 12 and the two profits meet at ₹24,000. Over the whole life of the contract the methods agree, because the same money moved either way. Accrual accounting changes when the profit is reported, and in the months between it gives a truer picture of what each month actually earned.
What the methods do differently
| Question | Cash basis | Accrual basis |
|---|---|---|
| When is a sale recorded? | When the customer pays | When the goods or service are delivered |
| When is a cost recorded? | When the bill is paid | When the cost is used or incurred |
| Customers who owe you | Not recorded until they pay | Receivables, an asset |
| Money received for work not yet done | Income straight away | Deferred revenue, a liability |
| Costs paid ahead of use | A cost straight away | Prepaid expense, an asset |
| Strength | Simple, and always matches the bank | Shows what each period earned and cost |
| Weakness | Profit swings with payment dates | Needs judgement, and hides the bank balance |
| Where it is used | Very small businesses and personal finance | Companies, and anyone following Ind AS or IFRS |
Accrual accounting does not ignore cash. It moves the cash information to a separate statement. The cash flow statement from the previous lesson exists to put the cash view back beside the accrual one.
Four items that make it work
Accrual accounting needs somewhere to keep the gap between when something happens and when the money moves. That place is the balance sheet, and four items do the job.
| Item | In Meena's shop | On the balance sheet |
|---|---|---|
| Receivable | A customer buys on credit and has not paid yet | Asset: money owed to her |
| Prepaid expense | Insurance paid for 12 months, with 9 still to run | Asset: cover she has paid for and not yet used |
| Deferred revenue | The school paid for 12 months, with 9 still to deliver | Liability: goods she owes the school |
| Accrued expense | March electricity used, with the bill arriving in April | Liability: a bill she has yet to receive |
Deferred revenue is the one beginners find odd. The school's ₹1,20,000 is in Meena's bank on day one, but she has not earned it. Until she delivers, it is an obligation, so it sits among her liabilities. Each month she delivers, one-twelfth moves from deferred revenue into revenue.
A real company: Info Edge
Info Edge (India) Limited runs Naukri.com for jobs and 99acres for property, along with other online classifieds. Its managing director has described the business as a subscription model with renewals, which makes it Meena's school contract at scale. Customers are billed for a package, and the company reports a deferred revenue balance for the part of the service still to be delivered. All figures below are Info Edge's standalone figures, in ₹ crore.
| ₹ crore | FY2023-24 | FY2022-23 |
|---|---|---|
| Billings | 2,496 | 2,366 |
| Revenue from operations | 2,381 | 2,159 |
| Billings less revenue | 115 | 207 |
| Deferred revenue at year end | 1,136 | 1,019 |
| Change in deferred revenue | 117 | n/a |
In FY2023-24 Info Edge invoiced ₹2,496 crore and recorded ₹2,381 crore of revenue. It billed ₹115 crore more than it recognised, and its deferred revenue balance grew by about ₹117 crore over the year. The two figures are close because deferred revenue is where the difference is stored. The small gap between them comes from rounding and from items the presentation does not break out.
Look at the closing balance too. ₹1,136 crore of deferred revenue is about 48% of a year's revenue, or close to 5.7 months of it. Under accrual accounting that work is still to be delivered, so none of it is in profit yet. Under cash accounting it would already count as income.
What this does and does not tell you
Billings grew about 5% in FY2023-24, from ₹2,366 crore to ₹2,496 crore, while revenue grew about 10%, from ₹2,159 crore to ₹2,381 crore. Revenue can grow faster than billings when deferred revenue from the year before is being delivered, as it is here. Info Edge started FY2023-24 with ₹1,019 crore of deferred revenue, and the part delivered during the year counted as revenue. That is accrual accounting at work: revenue follows delivery, so it trails billings.
Compare this with Titan in the previous lesson. Titan's cash ran behind its profit because it was building stock. Info Edge's invoices run ahead of its revenue because customers are billed before the service is delivered. Both gaps are timing, in opposite directions.
Billings are not cash and they are not revenue, so use them as a signal and not as a result. Because the measure is defined by each company, never compare one company's billings with another's without reading how each defines it. This is an educational reading of published figures, not a view on whether Info Edge's shares are a good or bad investment.
Accruals on three balance sheets
Accrual accounting records revenue when it is earned and expenses when they are incurred, whatever the timing of the cash. The gap between the two shows up on the balance sheet as accrual items: money received before the work is done, or costs recognised before they are paid. The table picks one important accrual item for each of three global companies, and shows its size against the year's revenue.
| Company | Accrual item on the balance sheet | Millions | As a share of the year's revenue |
|---|---|---|---|
| Apple | Deferred revenue | $9,055 | 2.2% |
| Microsoft | Short-term and long-term unearned revenue | $67,265 | 23.9% |
| Toyota | Liabilities for quality assurance (warranties) | ¥1,965,748 | 4.1% |
The three are different because the businesses are different. A software and cloud company is paid in advance for services it will deliver over a year, a hardware company sells a product and delivers it at once, and a car maker promises to repair defects for several years after the sale.
What each one means
Microsoft: paid before delivery. Unearned revenue is $67,265 million, which is 23.9% of the year's $281,724 million revenue. When a customer pays for a year of a service up front, the cash arrives first, but the revenue is recognised bit by bit as the service is provided. Until then the company owes the service, so the amount is a liability. Of the total, $64,555 million is due within a year. A year earlier the balance was $60,184 million, and it has grown 11.8% against revenue growth of 14.9%. Because the cash comes in ahead of the revenue, a growing balance of unearned revenue is a sign that customers are committing to future periods, though it does not prove it.
Apple: a small share, as a product company. Deferred revenue is $9,055 million, 2.2% of the year's $416,161 million revenue. Most of Apple's sales are delivered when the customer takes the product, so there is little cash received ahead of delivery. What is deferred is the portion of what customers have paid that Apple has not yet earned.
Toyota: costs recognised before they are paid. The liability for quality assurance is ¥1,965,748 million, 4.1% of revenue, against ¥1,836,314 million a year earlier. When a car is sold, the company already expects to spend money on warranty repairs later. Accrual accounting records an estimate of that cost in the year of the sale, so that the profit from the sale is not overstated, and keeps the liability until the repairs are paid for. Since it is an estimate, it can be too high or too low, and later years adjust. Toyota also reports ¥1,827,933 million of accrued expenses, costs incurred but not yet paid.
The rule behind the revenue line
Both main sets of standards now use the same five-step model for recognising revenue. IFRS 15, used by Toyota and, with Ind AS 115, by Indian companies, and Topic 606 of US GAAP, used by Apple and Microsoft, were developed together and share one principle: recognise revenue when control of a good or service passes to the customer, in the amount the company expects to be entitled to. The steps are to identify the contract, identify the separate promises in it, set the price, split the price across the promises, and recognise revenue as each promise is met. This convergence is one of the few areas of the two systems that were deliberately made alike.
Even so, the judgement involved is real. A company that sells a device with a software subscription and support has to decide how to split the price, how long the service lasts and when the customer receives value. That is why two annual reports with the same standard can still show different unearned revenue. When you read a filing, the revenue recognition note explains these choices for that company, and it is worth finding.
The link to the previous lesson is direct. Microsoft's growth in unearned revenue increased its operating cash flow relative to profit, and Toyota's warranty cost is expensed before the repair is paid. Cash and profit measure different things, and accruals are the bridge between them.
Common mistakes
Calling billings revenue
Billings are what was invoiced. Revenue is what has been earned. For Info Edge in FY2023-24 they differed by ₹115 crore.
Treating deferred revenue as income
Deferred revenue is cash, or an invoice, for work not yet done. It is a liability until the work is delivered. Counting it as profit overstates the year.
Assuming accrual is simply more accurate
Accrual figures show what a period earned and cost, but they rest on judgement about when work is delivered. Cash figures are simple and hard to argue with. That is why a full set of accounts includes both.
Forgetting the year-end cut-off
A cost used before the year ends belongs in that year even if the bill arrives afterwards. March electricity is a March cost, recorded as an accrued expense, whatever date the bill is paid.
Try it yourself
1. On 1 July a gym receives ₹12,000 for a twelve-month membership. Its financial year ends on 31 March. How much revenue has it earned by 31 March under accrual accounting, what is the deferred revenue at that date, and what does cash accounting record?
Show the working
July to March is 9 months, so accrual revenue is ₹12,000 × 9 ÷ 12 = ₹9,000. The remaining 3 months, ₹3,000, is deferred revenue. Cash accounting records the full ₹12,000 as income in the year the money arrived.
2. A shop pays ₹60,000 on 1 October for a year of rent. Its financial year ends on 31 March. What expense and what prepaid balance does accrual accounting show at year end?
Show the working
October to March is 6 months, so the expense is ₹60,000 × 6 ÷ 12 = ₹30,000. The other ₹30,000 covers the next six months and sits on the balance sheet as a prepaid expense, an asset. Cash accounting would show the whole ₹60,000 as a cost this year.
3. A subscription company invoiced ₹500 crore this year and recorded ₹460 crore of revenue. Roughly how should its deferred revenue have changed, and why?
Show the working
It should have risen by about ₹40 crore (₹500 crore less ₹460 crore). The company billed more than it earned, and the surplus is stored as deferred revenue until the services are delivered. Refunds and rounding can make the real figure a little different.
Where this is used
Anyone who sells in advance meets this. Gyms, schools, software companies, publishers and insurers collect money before delivering, so they carry deferred revenue. Anyone who pays in advance, for insurance, rent or annual licences, carries prepaid expenses.
- An analyst compares revenue with billings and watches deferred revenue to see whether future revenue is building or running down.
- A lender reads both the accrual statements and the cash flow statement, because a profit on paper is not a payment on the day.
- A small business owner uses the cash view to keep the lights on and the accrual view to see whether each month really made money.
Key terms
- Cash basis
- Recording income when money is received and expenses when money is paid.
- Accrual basis
- Recording income when it is earned and expenses when they are incurred, whatever date the money moves.
- Revenue recognition
- The rules for deciding when revenue is recorded. Under Ind AS 115 it follows the transfer of goods or services to the customer.
- Matching
- Recording a cost in the same period as the revenue it helped to produce.
- Receivable
- Money owed to the business for goods or services already delivered.
- Prepaid expense
- A cost paid in advance for something not yet used. An asset until it is used.
- Deferred revenue
- Money received or invoiced for goods or services not yet delivered. A liability until the work is done.
- Accrued expense
- A cost already used but not yet paid or billed. A liability.
- Billings
- The amount a company has invoiced its customers in a period. A company-defined measure, not cash and not revenue.
Questions people ask
Which method is better?
They answer different questions. Cash accounting shows what the bank holds. Accrual accounting shows what a period earned and cost. Companies use accrual for their accounts and add a cash flow statement, so readers get both views.
Can a business switch from cash to accrual?
Yes, and many do as they grow, take loans or start selling on credit. A switch needs care, because balances such as receivables and prepaid costs have to be set up at the start. The rules that apply to you depend on your business type and country, so check them before changing.
Is deferred revenue a debt?
It is a liability but not a loan. It is settled by delivering the goods or service, not by repaying money, unless the customer is refunded.
Does accrual accounting change how much cash a business has?
No. It changes when income and costs are recorded, not what is in the bank. Tax rules have their own timing rules, which can differ from the accounts.
Sources and review
- Info Edge (India) Limited, earnings presentation for the quarter and year ended 31 March 2024. Source of standalone billings, revenue from operations (slide 7) and deferred revenue (slide 37).
- Info Edge (India) Limited, business update of 7 April 2024. Used to cross-check annual standalone billings.
- Info Edge (India) Limited, Q3 FY24 earnings call transcript, 19 February 2024. Management's description of the business as a subscription model with renewals.
- Institute of Chartered Accountants of India, Chapter IX of the Companies Act, 2013, including section 128 on books of account kept on the accrual basis.
- Institute of Chartered Accountants of India, educational material on Ind AS 115, Revenue from Contracts with Customers.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
How the numbers were checked: the Info Edge figures come from the company's own presentation, and annual billings were confirmed against its business update. The change in deferred revenue was compared with billings less revenue, and the two agree within a few crore. Meena's figures are calculated on this page, and at month 12 both methods give the same profit.