Use of Accrual vs Cash Systems
of Accounting
Ted Mitchell
Accountants
• Seek to match costs and revenues over time
• You buy a pastry machine for $7,200 and it is expected
to make pastry for 2 years
• A cash system of reporting would write off the $7,200
as an expense in the first week
• Huge losses being reported in the first week and
inflated returns for next 23 weeks
• An accrual system divides the $7,200 cost of the
machine into 24 charges of $300 each and reports the
expense as $300 cost a week to provide a more
realistic view of the amount being earned each week
Start up Costs for 1 Month
Fixed
expense
Rent for
Month
$2,000
Utilities
$500
per month
You will have inescapable fixed overhead costs of $2,500 every
month Or $625 in cash each week
Start up Costs for 1st Month
Fixed
Monthly
Cost
Minimum
Sunk or
Start up
Maximum
Sunk or
Start up
Buy a
Coffee
Maker
$3,000
$6,000
Buy
Furniture
$2,000
$4,000
Total
$5,000
$10,000
Rent for
Month
$2,000
Utilities
$500
per month
You will sink between $5,000 and $10,000 into the business in
the first month
Start up Costs for 1st Month
Fixed Cost
Minimum
Cost in
Month 1
Maximum
Cost in
Month 1
$2,000
$2,000
$2,000
Utilities
$500
per month
$500
$500
Coffee
Maker
$3,000
$6,000
Furniture
$2,000
$4,000
Total
$7,500
$12,500
Rent for
Month
You will spend between $7,500 and $12,500 in cash into the
business in the first month
Starting Biz-Cafe
• You get $25,000
• You will spend $7,500 to $12,500 for
equipment and rent to run for 1 month and
quit the business
• Leaves $17,500 to $12,500 to hire employees,
buy coffee and cups, do advertising, etc.
• Given the start up costs can you make a profit
in one month?
• Your Accountant is Using an Accrual system!
Accrual System
• Can spread the reported cost of the coffee
machine and the furniture out over a five year
time frame
• But there is still the cash outflow when the
things are bought
Cost for per month with hopes to run
for 60 months (5 years)
Fixed
Sunk in
month 1
Allocated Sunk in Allocated
by 5 year month 1 by 5 year
Depreciat
Deprecia
t
Rent for
Month
$2,000
$2,000
$2,000
$2,000
$2,000
Utilities
$500
$500
$500
$500
$500
Coffee
Maker
$3,000
$50
$6,000
$100
Furniture
$2,000
$33.33
$4,000
$66.67
Total
$15,000
$2,583
$20,000 $2,667
Using Depreciation to match costs to revenues over time
The monthly cost is reported between $2,583 and $2,667 a month
Cash Flow is NOT
• The same as the Amount as the Profit Flow
over any given reporting period
• Daily, weekly, monthly, annual
Difference between
Cash and Accrual Reporting
• Cash Reporting is simpler but makes the profit
picture for the first week, month, year, etc. look
terrible
• Depreciation makes the profit picture in the first
month look considerably better
• But the actual hit on the cash reserves is still real
Depreciation is not a fund of money for
replacement.
• Accrual accounting is a procedure for matching
costs and revenues over time!
Cash Flow Report in the Game
• Is the Checkbook:
• Is usually out of sync with the monthly
revenue and the profit flow
• Accrual system to try to match costs and
revenues so that shareholders have a better
understanding about the return on their
investment
The Profit Flows in the game
• are reported in
• 1) The Monthly Income Statement
• 2) The Monthly Balance Sheet
Starting Biz-Cafe
• You get $25,000
• Depreciation gives us the false sense of cash
profits by trying to match costs and revenues
over 60 months
• But the game goes for a maximum of 16
weeks
• Your inescapable costs are reported to be
between $2,583 and $2,667 per month!
• But Decisions are weekly!
You as Marketing managers will find
• The classic monthly accural-based Accounting
Reports
– Balance sheet
(important for retained earnings)
– Income statement
• To be inadequate for making profitable
marketing decisions
• You will be wanting a weekly marketing
performance report that
Two very useable weekly reports
• The Dashboard Report
• And
• The Weekly Sales Receipts Report
You will want to build a weekly
marketing manager’s report
• On a spreadsheet
• constructed for the reporting of a weekly
marketing performance It will include:
• Price, Demand, Revenues, Cost of Goods Sold,
Gross Profit, Direct Marketing Expenses for
the Week and Marketing Profit!
Any Questions
• 1) What is an accrual system of reporting
• 2) Why is it used rather than a cash flow for
reporting profit
• 3) What is the cash flow report in the game?
• 4) What are the accrual reports on profits
• 5) Why a weekly marketing report is needed?