2.1 Accrual vs Cash Basis & Timing of Adjustments

AIPB's Certified Bookkeeper (CB) credential tests whether you can take a set of books through the adjusted trial balance. AIPB describes Mastering Adjusting Entries as the skill of computing and recording end-of-month, end-of-quarter, or year-end adjustments, then building the trial balance and the adjusted trial balance. Part 1 at Prometric is two hours and $100: Test 1 (Adjusting Entries, one hour) plus Test 2 (Error Correction and Bank Reconciliation, one hour). You must score 75 percent on each test. This Independent OpenExamPrep chapter teaches the accrual and deferral mechanics that sit under that test. It is not AIPB courseware and does not claim official approval.

Why the books are wrong at 11:59 p.m. on the last day

Source documents — vendor invoices, customer invoices, checks, and deposits — capture cash and billed amounts. They do not automatically capture work you finished but have not billed, wages employees earned since the last payday, a month of insurance that was paid last quarter, or a retainer that the client paid in December and you finally earned in January. The unadjusted trial balance is a listing of ledger balances before those cutoff items. If you print financial statements from it, January profit is wrong, January assets and liabilities are wrong, and the next period inherits the error.

Two principles force the cutoff:

• The time-period assumption says a business that never stops operating still reports in months, quarters, and years. Someone has to draw a line on January 31, March 31, or December 31.
• The matching principle says expenses belong in the same period as the revenues they helped produce. January wages that support January billings belong in January, even if payday is February 7.

Revenue recognition on the accrual basis is the companion rule: record revenue when the performance is complete (the work is done, the period of service has run), not when you print the invoice and not when the check clears. Cash-basis bookkeeping ignores both rules and records the event when money moves. Cash-basis statements can be useful for a checkbook, but they are not the measurement AIPB is testing when it asks you to adjust to the trial balance that feeds GAAP-style statements for firms of up to 100 employees.

Cash basis versus accrual basis with the same facts

Harbor Bookkeeping LLC finishes a $3,000 cleanup engagement on January 28, 2026. It invoices on February 4 and collects on February 18. January office rent of $1,800 was paid on December 1 as part of a $5,400 prepayment covering December–February. Staff earned $4,200 of wages in the last three days of January; payday is February 6.

On the cash basis, January revenue misses the $3,000 job, January rent expense is missing because the check was in December, and January wages are missing until February. On the accrual basis, January shows the $3,000 earned, $1,800 of rent consumed, and $4,200 of wages incurred — which is what the matching principle and the time-period assumption require.

The chart after the decision tree uses the $3,000 job alone so you can see how one fact produces two different monthly revenue pictures. Accrual January gets $3,000 and accrual February gets $0. Cash-basis January gets $0 and cash-basis February gets $3,000. The job did not move; only the recognition rule moved.

Five types of adjusting entries

Every period-end adjustment you will study in this guide and the next one falls into one of five groups. This chapter covers the first three in depth. Chapter 3 covers prepaid expenses and estimates (allowance for doubtful accounts, depreciation, and similar).

A deferral means cash moved before the revenue or expense is recognized. An accrual means you recognize revenue or expense before cash moves. If you can answer "has cash already hit the ledger for this item?" you can pick the family. If you cannot, do not guess — reconstruct the original entry from the prepaid, unearned, or cash account.

The Cash prohibition (and the later exception)

Adjusting entries for accruals and deferrals do not use Cash. That is the highest-frequency Certified Bookkeeper trap in this unit.

• Accrued January fees of $3,000: debit Accounts Receivable $3,000; credit Service Revenue $3,000. Cash appears in February when the client pays, as debit Cash; credit Accounts Receivable.
• Accrued January wages of $4,200: debit Salaries Expense $4,200; credit Salaries Payable $4,200. Cash appears on payday.
• January portion of unearned fees: debit Unearned Service Revenue; credit Service Revenue. Cash already hit the books on the day the retainer arrived.
• January insurance used: debit Insurance Expense; credit Prepaid Insurance. Cash already hit the books on the day the policy was paid.

Putting Cash in those four entries double-counts money that either has not arrived or already arrived. The only common bookkeeping entries that look like "adjustments" and do touch Cash are bank-reconciliation items — bank service charges, NSF checks, and interest the bank already posted. Those are taught with error correction and the monthly bank rec, not as revenue/expense accruals and deferrals. Until that chapter, treat "adjusting entry uses Cash" as a red-flag wrong answer.

Reversing entries are optional tools, not a fifth type

A reversing entry is dated the first day of the next period and flips an accrual. It is not a sixth kind of adjustment and it is not required. Bookkeepers reverse many accrued revenues and accrued expenses so that the next routine invoice or payroll check can be recorded the ordinary way (debit Cash or debit expense; credit Cash) without splitting the amount between a payable/receivable leftover and the new period. Deferrals — leftover unearned balances and leftover prepaid balances — are usually not reversed, because those balances are still real. Sections 2.2 and 2.3 walk the numbers.

Worked cutoff for Harbor on January 31

Harbor's unadjusted trial balance already includes Cash $18,400, Accounts Receivable $6,200, Prepaid Insurance $1,200 (six months of coverage bought January 1), Unearned Service Revenue $4,800 (a three-month engagement collected January 1), Service Revenue $22,000, and Salaries Expense $8,000 (payroll checks actually issued in January).

Before you post anything, name the type:

1. Unbilled $3,000 job — accrued revenue. No cash yet. Debit Accounts Receivable $3,000; credit Service Revenue $3,000.
2. Three days of unpaid wages $4,200 — accrued expense. No cash yet. Debit Salaries Expense $4,200; credit Salaries Payable $4,200.
3. One month of the $4,800 unearned engagement earned in January ($1,600) — unearned revenue adjustment. Cash already recorded January 1. Debit Unearned Service Revenue $1,600; credit Service Revenue $1,600.
4. One month of the $1,200 prepaid insurance ($200) — prepaid expense adjustment. Cash already recorded January 1. Debit Insurance Expense $200; credit Prepaid Insurance $200. That last one is Chapter 3 mechanics, shown here only so you see why it is a deferral, not an accrual, and why Cash stays out.

None of the four credits or debits Cash. After they post, the adjusted trial balance is the input to the income statement and balance sheet. Skip any of them and both statements are wrong in opposite directions: revenue too low or too high, expenses too low, assets missing, liabilities missing.

Exam traps in this section

• Treating the invoice date or collection date as the revenue date on the accrual basis.
• Calling prepaid insurance an accrued expense and crediting Insurance Payable even though Prepaid Insurance is sitting on the trial balance.
• Recording the January 1 cash receipt of unearned fees as January revenue, then wondering what to adjust.
• Putting Cash on the January 31 adjusting entry "to make it balance."
• Mixing reversing entries into the January 31 journal; reversing is dated the next period, after the statements are done.