CHAPTER 3

Accrual & Deferral Timing Differences

The measurement of net income requires that revenue be reported as it is earned, and that expenses offset revenue as incurred, regardless of when cash is received or disbursed. Dividing the life of an enterprise into arbitrary reporting periods—such as quarters or years—makes income measurement challenging, given that many revenue and expense transactions span multiple reporting periods. Thus, it is common for revenue and expenses to occur prior to, or following, the collection or payment of cash. These timing differences give rise to revenue and expense deferrals and accruals.

When cash collections occur before earning revenue, or cash disbursements occur before incurring expenses, the cash flow ...

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