Accrual accounting

What it means

Recognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.

The exam angle

The gap between accrual earnings and cash flow is where most accounting-quality questions live. Persistently high accruals are a warning sign.

Where it appears in the syllabus

• Financial Statement AnalysisCFA Level I · exam weight 11–14% · The three statements, inventories, long-lived assets, quality of earnings.

Related terms

• Balance sheetA statement of what a company owns and owes at a single point in time.
• Book valueThe accounting value of equity: assets less liabilities as reported.
• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.
• Cash flow from operationsCash generated by the core business, before investment and financing.
• Current ratioCurrent assets divided by current liabilities, a rough test of short-term solvency.
• Deferred taxTax arising from timing differences between accounting profit and taxable profit, recognised as an asset or a liability.