Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash is actually received or paid.
Cash flow accounting only records when money actually moves in or out of the business.
⚖️ Why Accrual Accounting Can Be Less Reliable
1. Subjectivity & Estimates
Requires management judgment (e.g., estimating bad debts, useful life of assets for depreciation, provisions).
These estimates can be manipulated to make results look better.
2. Timing Differences
Revenue might be recognized today (accrual), but the cash could arrive months later—or maybe not at all.
This creates a gap between reported profit and actual liquidity.
3. Earnings Management
Companies can use accounting rules to “smooth” earnings (accelerating revenue recognition or deferring expenses).
Cash flow is harder to fake because actual money has to move.
4. Complex Adjustments
Accruals involve adjustments (prepayments, accrued expenses, deferred revenues). Errors or biases here reduce reliability.
💵 Why Cash Flows Are Seen as More Reliable
Cash doesn’t lie: it shows the actual ability of a firm to pay debts, invest, and return money to shareholders.
Analysts often cross-check net income (accrual) against operating cash flow to detect red flags.
👉 In short:
Accrual accounting = better for performance measurement (profitability, matching revenues/expenses).
Cash flow = better for reliability and liquidity assessment (actual money available).