Accrual accounting - recognizes revenue when earned or billed and expenses when incurred or billed . Cash basis accounting - recognizes revenue when collected and expenses when paid . METHODS OF ACCOUNTING
JANUARY 1
THROUGHOUT YEAR
NOV 30
A firm is founded and capitalized with $500,000 of the founder’s own money
The founder hires people and works on a client project. The firm spends $490,000 on payroll and other things
The firm invoices its client in the amount of $750,000!
The firm shows an accrual-based profit for the year: $750,000 in revenue and $490,000 in expense = $260,000 in profit! On a cash-basis, the firm showed a loss of $490,000! The client hadn’t paid the invoice by Dec 31. With $10,000 in the bank, what is the founder going to do?
THE PRINCIPALS ACADEMY 2022 109
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