Methods of Creating Profit and Loss (P&L) Statement
Accrual Method |
Cash Method |
---|---|
Using the accrual method, revenue is recorded as it is earned. Consequently, an organization that uses the accrual method records revenues that it expects to earn at a later time. For example, in the case of a business that provides a service or product to a customer, the revenue will appear on the P&L statement regardless the fact that payment has not been received. Likewise, liabilities are recognized and recorded in the financial statements of the organization, regardless of the fact that no expenses have been paid. |
When cash enters and exits the business, only then does the cash method, also known as the cash accounting method, come into play. This straightforward approach accounts only for cash paid or received. When cash is received, a business documents the transaction as revenue; when cash is used to pay bills or commitments, the transaction is recorded as liability. This approach is often used by individuals and smaller organizations seeking to handle their personal finances. |