When will profit figures differ between cash and accrual accounting?

Profit figures differ between cash and accrual accounting during the accounting period because these two methods recognize income and expenses at different times.

In cash accounting, revenues are recognized when cash is received, and expenses are recognized when cash is paid. This means that if a sale is made on credit, it won't be recorded as revenue until the cash is actually received. Similarly, if a company incurs an expense but hasn’t yet paid it, the expense will are not recognized until the cash payment occurs.

On the other hand, accrual accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when the cash is exchanged. This allows for a more accurate representation of a company's financial position and performance during the accounting period, as it matches income earned with the expenses incurred to generate that income.

This distinction leads to different profit figures at various points within the accounting period, particularly between transactions that result in delayed cash flows. For example, if a company makes credit sales, its accrual accounting will reflect those sales in its profit calculations, leading to a higher profit figure than what cash accounting would show until the cash is collected.

Understanding the timing of revenue and expense recognition is crucial in grasping why profit figures calculated through these two methods can differ