"We made ₦5m profit last quarter, so why is the account empty?" The answer is usually the difference between accrual and cash accounting. Understanding both is one of the most useful finance skills an owner can have.
What is cash basis accounting?
Cash basis records income when money lands in your account and expenses when money leaves it. It matches your bank statement and is intuitive. But it ignores what clients owe you and what you owe suppliers.
What is accrual basis accounting?
Accrual basis records income when it's earned, usually when you invoice, and expenses when they're incurred, when you receive the bill, whether or not money has moved. It shows how the business is actually performing, and it's the basis for proper financial statements.
Worked example: one month at an agency
In October the agency:
- invoiced ₦10m to clients, of which ₦4m was paid in October;
- received ₦3m from September invoices;
- incurred ₦6m of costs, of which ₦5m was paid and ₦1m is an unpaid supplier bill.
| Cash basis | Accrual basis | |
|---|---|---|
| Income | ₦7m (₦4m + ₦3m received) | ₦10m (invoiced in October) |
| Expenses | ₦5m (paid) | ₦6m (incurred) |
| Profit | ₦2m | ₦4m |
Neither is "wrong". They answer different questions: how much cash did we generate? versus how much did we earn?
Which one do Nigerian companies have to use?
Companies prepare statutory financial statements on an accrual basis under the financial reporting standards adopted in Nigeria (IFRS, or IFRS for SMEs where eligible). Your company income tax return is based on those accounts. Your accountant will produce accrual accounts at year end whatever you track day to day.
Which should I look at as an owner?
Both, for different decisions:
| Question | Look at |
|---|---|
| Are we profitable? Is pricing right? | Accrual profit and loss |
| Can we pay salaries next week? | Cash flow and bank balance |
| Who owes us, and for how long? | Aged receivables |
| What do we owe suppliers? | Aged payables |
A healthy routine: read the accrual P&L monthly and the cash position weekly.
Watch out for VAT timing
VAT is generally due based on when you invoice (accrual), not when you're paid. On a cash-basis view you can think you're fine while you owe VAT on money you haven't received yet. See VAT for service companies.
How BizBooks shows both
The Profit & Loss report has an accrual/cash switch. The dashboard shows cash flow (money that actually moved) next to profit and loss (accrual), plus aged receivables and payables. See bookkeeping and reports.
Frequently asked questions
What is the difference between cash and accrual accounting?
Cash accounting records transactions when money moves. Accrual accounting records them when they're earned or incurred, whether or not they've been paid.
Which accounting method is required in Nigeria?
Companies prepare statutory financial statements on an accrual basis under the applicable financial reporting standards, and company tax is based on those accounts.
Can a company be profitable but have no cash?
Yes. If clients pay late, accrual profit can be high while the bank balance is low.
Should a small company use cash basis?
You can track cash for day-to-day management, but your year-end accounts will still be prepared on an accrual basis.