Let's take a look at a couple of examples. Here is our first example. We have two activities and we need to figure out when to recognize revenue or expense under both accrual accounting, and cash accounting. Let's take a look at that first activity, performed accounting work for $2,000 on October 7th, 2021, and received payment on November 7th, 2021. For accrual accounting, when would we recognize that revenue? October 2021 when the work was performed. For cash accounting, when would we recognize the revenue? Not until November 2021, because that's when cash was received. Let's take a look at the second activity. Received an electric bill for $750 on November 25th, 2021, and paid it on December 4th, 2022. Under accrual accounting, we will recognize it in November 2021. For cash accounting, we will not recognize that expense until December 2021 when the cash was paid. Let's take a look at our second example. We're going to be creating a mini income statement under accrual accounting and cash accounting for years 2022 and 2023 based on three different activities. Let's take a look at the first activity. Performed construction work for $50,000 in 2022 and received payment in 2023. Next, construction employees earned and were paid $15,000 in 2022, and then finally purchase construction supplies for $12,500 in 2022. Let's take a look at the income statement under accrual accounting for 2022. We would recognize revenue of $50,000 in 2022, because that's when the work was performed. Expenses, we would recognize both the 15,000 and the 12,500 in 2022 as well, and get net income of 22,500. The income statement under accrual accounting for these three activities in 2023, would be absolutely nothing. Now let's take a look at cash accounting. For 2022, we would only recognize the expenses. We would only recognize the expenses, because no cash was received for the revenue earned in 2022, but since payment was not received until 2023 under cash accounting, there would be no revenue recognized. Since they earned and paid employees and paid for construction supplies of 15,000 plus 12,500 for a total of 27,500, under cash accounting, we would have a net income of negative 27,500. Then in 2023, when cash was paid, that's when they would recognize the revenue. To see how the mismatch in cash accounting can cause the associated expenses not to be matched with its associated revenue. So accrual accounting is far superior.
