Understanding Accrual vs. Cash Accounting

Your bank account is a terrible way to measure actual profit. That is exactly

why accrual accounting takes over where cash basis fails. Think about it, if you pay for twenty-four

months of insurance today, you didn't actually lose all that value instantly.

You traded cash for an asset that you burn through slowly. We call that a prepaid

expense. The same logic applies to big equipment. You don't expense a whole truck the

day you buy it, you spread that cost over years using depreciation. Adjusting entries

fixes the timing so your financial statements reflect reality, not just when cash

happened to leave your hand.