Accrual accounting.

Accrual accounting records revenue when earned and expenses when incurred under the applicable recognition principles, rather than waiting for cash to move.

Put it into practice.

A business completes work and invoices a customer. Recognizing the earned revenue and a receivable can occur before payment arrives.

A common mistake

Cash flow and profitability are related but distinct. An unpaid invoice can contribute to reported revenue while leaving the business short of cash.

Original independent study explanation. Revised October 2026. Practice assumptions are illustrative.