Cash Versus Accrual Basis of Accounting: An Introduction
Released: 2014-12-12T00:00:00

Summary:
This report introduces two general methods of accounting—the cash basis method and accrual basis method. The choice of accounting method determines the timing of the recognition of revenue and expenses. Under cash basis accounting, revenue and expenses are recorded when cash is actually paid or received. Under accrual basis accounting, revenue is recorded when it is earned and expenses are reported when they are incurred. Understanding the differences between these two accounting methods could be helpful to Congress as it considers reforming the tax system and changing the federal government's financial reporting requirements.
Currently with certain exceptions, the Internal Revenue Code (IRC) requires some companies with gross receipts in excess of $5 million to use accrual basis, instead of cash basis, of accounting to determine their tax liabilities. The IRC's requirement to use the accrual method, arguably, ensures that revenue and the expenses incurred to generate that revenue are realized in the same year. Types of companies that may be excepted from using accrual basis of accounting for income taxes are sole proprietors and certain qualified personal service corporations (PSCs) in such fields as health, law, engineering, accounting, performing arts, and consulting firms, as well as farms that are not corporations or do not have a corporate partner.
Some Members of Congress have put forth proposals to revise the circumstances under which certain companies are able to use cash method. House Ways and Means Committee Chairman Dave Camp introduced H.R. 1, the Tax Reform Act of 2014, on December 10, 2014. Among the changes proposed in the bill is the requirement that some partnerships, S corporations, and PSCs use the accrual method instead of the cash method to determine their federal taxable liability. Specifically, these business types would be required to use the accrual method if their average annual gross receipts exceeded $10 million. Former Senate Committee on Finance Chairman Max Baucus included a similar provision in his Cost Recovery and Accounting staff discussion draft, which has not been formally introduced as legislation. The Small Business Accounting and Tax Simplification Act (H.R. 947), Start-up Jobs and Innovation Act (S. 1658), and Small Business Tax Certainty and Growth Act (S. 1085), introduced in the 113th Congress, would raise the gross receipt test limit from $5 million to $10 million.
The President's budget is prepared primarily using cash basis. The Financial Report of the United States Government is prepared using both accrual and modified cash basis. For the past 17 years, the Government Accountability Office (GAO) has issued a disclaimer of opinion on the Financial Report of the United States Government. One of the reasons stated by GAO for the disclaimer of opinion for the 2013 financial report was that the federal government's process for preparing the consolidated financial statements was ineffective to determine whether the financial reports were presented fairly in accordance with U.S. Generally Accepted Accounting Principles (GAAP).
A number of congressional proposals would change how the U.S. government's financial reports are prepared. In the 113th Congress, the GAAP Act (H.R. 476) and H.Res. 545 would require the federal government's budget, financial reports, and performance evaluation reports to be prepared using both cash and accrual method.
This report introduces the difference between cash and accrual methods by providing an overview of concepts and theories that underlie these accounting methods. It then explores these concepts through the business cycle of a fictitious small business and how the basis of accounting would affect the financial condition of the business.

subsections: section_title: Introduction
paragraphs: Businesses generally use one of two accounting methods for calculating their federal tax liabilities or for financial reporting. The choice of accounting method determines the timing of the recognition of revenue and expenses. Under cash basis accounting, revenue and expenses are recorded when cash is actually paid or received. Under accrual basis accounting, revenue is recorded when it is earned and expenses are reported when they are incurred. In other words, under accrual accounting revenue and expenses are recognized regardless of when payment is actually made or received. A number of recent congressional proposals would change the tax accounting requirements for certain businesses, which could result in changes in tax liabilities. Similarly, a number of proposals would change how the U.S. government's financial reports are prepared. 
This report introduces the differences between cash and accrual methods of accounting. The explanations and examples provided in this report emphasize the central concepts needed to understand cash and accrual method of accounting. A detailed discussion of the many complex technical accounting details that would need to be carefully considered if current requirements were to be changed is beyond the scope of this report. A brief presentation of some of the most useful technical concepts appears in the Appendix .
section_title: Recent Legislative Developments
subsections: section_title: Tax Policy
paragraphs: The Internal Revenue Code (IRC) generally requires businesses with average gross receipts in excess of $5 million to use accrual accounting rather than the cash method for tax purposes. Prior to the enactment of the Tax Reform Act of 1986, ( P.L. 99-514 ) businesses were allowed to elect various methods of accounting for reporting revenue and expenses that were then used to determine their tax liabilities. The IRC's current requirement that certain businesses use the accrual method arguably addresses the concern that if related revenue and expense items that contribute to income are assigned to different years, then neither year's income nor tax liability will be properly reported by the business.
Under the current IRC, an exception exists for certain farms, partnerships, S corporations, and Personal Service Corporations (PSCs)—allowing these entities to use cash accounting regardless of their average gross receipts. These entities are considered pass-through entities, in which the tax liability is generally paid by the owners of the business and not directly by the business. For other businesses with gross receipts of less than $5 million, the cash method of accounting is available to determine tax liability as it is easier for record keeping and requires less effort. 
In the 113 th Congress, legislation has been introduced that would raise the threshold. Specifically, the Small Business Accounting and Tax Simplification Act ( H.R. 947 ), Start-up Jobs and Innovation Act ( S. 1658 ), and Small Business Tax Certainty and Growth Act ( S. 1085 ) would each expand the use of cash method accounting by raising the threshold of average gross receipts to $10 million from $5 million. Similar legislation was introduced in the 112 th Congress, the Small Business Tax Simplification Act ( H.R. 4643 ).
The Tax Reform Act of 2014, formally introduced as H.R. 1 by House Ways and Means Chairman Dave Camp on December 10, 2014, would more broadly modify the rules surrounding the choice of accounting method for some businesses. In addition to raising the threshold from $5 million to $10 million, the bill would require certain partnerships, S corporations, and PSCs to use accrual basis of accounting when their average annual gross receipts exceed $10 million. Raising the threshold would expand the use of cash accounting, for businesses with gross receipts between $5 million and $10 million. Former Senate Committee on Finance Chairman Max Baucus included a similar provision in his Cost Recovery and Accounting staff discussion draft, which has not been formally introduced as legislation. The proposals would restrict the use of cash accounting for certain types of businesses, making it unclear how these proposals would affect the use of cash accounting overall. The Joint Committee on Taxation has estimated that these modifications proposed by H.R. 1 would increase revenue by $23.6 billion over 10 years.
section_title: U.S. Government Financial Reports
paragraphs: A number of congressional proposals would change how the U.S. government's financial reports are prepared. In the 113 th Congress, the Generally Accepted Accounting Principles Act ( H.R. 476 ) would require the federal government's budget, financial reports, and performance evaluation reports to be prepared using both cash and accrual basis of accounting. Another piece of legislation, H.Res. 545 , encouraged the use of accrual accounting by expressing the sense of the House of Representatives that the federal government should adopt and use accrual basis generally accepted accounting principles for government budgeting, financial reporting, and performance evaluation purposes. In the 112 th Congress, Truth in Government Accounting Act of 2011 ( H.R. 3332 ), also would have required using both cash and accrual basis of accounting to prepare the government's budget and financial and performance reports.
section_title: Basis of Accounting: Concepts and Principles
subsections: section_title: Cash Basis
paragraphs: Cash basis of accounting is generally the more popular method to record and report revenue, expenses, and income; it is simpler than accrual accounting. Under cash accounting, income and expenses are recorded when payment is received or made. The cash method does not, however, accurately reflect a company's assets, liabilities, revenues, or expenses.
If a business incurs a large expense to provide a service before it has received the payment for the service, the business's financial statements may communicate a distorted financial condition of the business. Similarly, significant distortion on the financial condition of a business is reflected on the financial statements if it has received a large payment but has not yet delivered the product or provided the service. Cash basis accounting requires less effort in bookkeeping but it is not in accordance with the Generally Accepted Accounting Principles (GAAP). 
section_title: Accrual Basis
paragraphs: Accrual basis of accounting is in accordance with GAAP. U.S.-based publicly traded companies are required to file financial reports with the Securities and Exchange Commission (SEC) under GAAP accounting. The accrual basis differs from the cash basis in when revenue and expenses are recognized and in how assets and liabilities are reported. Accrual accounting provides a better picture of how well a company has performed during the periods measured. For most companies, the reporting period is usually a fiscal quarter or fiscal year. 
Accrual accounting's primary focus is on two types of business events. First, from an asset perspective, an accrual is recorded when a service has been performed or a product has been delivered by a company but the payment has not yet been received. Similarly, from a liability perspective, an accrual is recorded when a service or product has been received, but the payment has not yet been made. Second, a deferral is recorded when payment is received before a service is performed or product has been delivered. 
Although accrual accounting provides consistent measurement and treatment of a business's economic events, it does not readily communicate a business's cash flow. A separate statement of cash flows must be presented along with the balance sheet, income statement, and statement of changes in shareholders' equity for users of the financial information to make informed decisions. The statement of cash flows is a useful tool in determining the short-term viability of a business, especially a company's ability to pay its bills on time. 
 Table 1 compares cash and accrual basis of accounting. 
section_title: Examples of Cash Versus Accrual Basis of Accounting
paragraphs: To illustrate how the choice of accounting method determines the timing of when revenue and expenses are recognized (and ultimately tax liability and cash flow), two different scenarios are presented. In each scenario, a subscriber purchases a two-year subscription for online new content. In the first scenario, the subscriber pays in the first year. In the second scenario, the subscriber pays in the second year. Under both scenarios, information communicated and conclusions drawn about the financial condition of the company differ depending on whether the cash or accrual basis of accounting is used. 
First, a narrative discussion that only focuses on the income statement is provided for each scenario. A more detailed explanation is then provided that incorporates two financial statements, an income statement, and a balance sheet. 
The first set of financial statements, Figure 1 - Figure 3 , report transactions if the payment was received in the first year, and the second set of financial statements, Figure 4 - Figure 6 , report transactions if the payment was received in the second year. Figure 1 - Figure 3 provide a better illustration of why accrual accounting provides a more complete picture of a company's financial performance as compared with cash basis of accounting, when the payment is received before the service is provided. Figure 4 - Figure 6 illustrate the impact on cash flow for a small business based on whether the business uses cash or accrual basis of accounting, when the service is provided but the payment has not yet been received.
In the examples below, a fictitious small company provides online subscription-only news service. The company is called ONSS and has a single subscriber during the two-year business cycle. 
A subscription requires a two-year commitment and costs $2,400 (total), which must be paid in full at either the beginning of the first or second year. The $2,400 cost of the subscription for the client is revenue for ONSS. Assume that ONSS incurs service expenses (costs) of $600 each year, or $1,200 total and the company is subject to a 10% tax rate. On January 1, 2015, ONSS had $600 cash on hand, same as the owners' interest (or ownership equity).
subsections: section_title: Scenario 1: Payment Received in the First Year
subsections: section_title: Cash Basis
paragraphs: ONSS receives a one-time payment of $2,400 in January 2015. At the end of 2015, ONSS has recognized $2,400 in revenue and $600 in expenses for an income (profit) of $1,800. ONSS pays $180 in taxes (10% of $1,800). After paying for the expenses incurred in the first year and paying taxes, ONSS has net income (net profit) of $1,620 ($2,400-$600-$180=$1,620). 
The clients' two-year subscription runs from 2015 to 2016. In 2016, no revenue is recognized by ONSS because the subscriber's full payment was recognized as revenue in 2015. ONSS incurs $600 in expenses to provide the service in 2016, resulting in a loss for the year. Under IRC Section 172, ONSS can carry the loss back to the previous year and claim a tax refund from the Internal Revenue Service (IRS). ONSS files for a refund of $60. Taxes paid over the first two years thus total $120. Net income for the two years for ONSS is $1,080.
section_title: Accrual Basis
paragraphs: ONSS receives a payment of $2,400 in January 2015. Because ONSS is following the matching principle of accrual accounting, it only recognizes revenue for which it has incurred expenses. ONSS recognizes $1,200 in revenue and $600 in expenses for an income of $600 in 2015. ONSS pays $60 in taxes (10% of $600). After paying for the expenses incurred in the first year and paying taxes, ONSS has net income of $540 ($1,200-$600-$60=$540) in 2015.
Similar to 2015, under accrual basis of accounting ONSS only recognizes revenue for which it has incurred expenses in 2016. Thus in 2016, ONSS recognizes $1,200 in revenue and $600 in expenses for an income of $600. ONSS pays $60 in taxes (10% of $600) again in 2016. After paying for the expenses incurred in 2016 and paying taxes in 2016, ONSS has net income of $540 ($1,200-$600-$60=$540). Taxes paid for the two years total $120. ONSS's net income for the two years is $1,080. Taxes and net income are the same as under cash basis over the life of the subscription, but timing varies. 
A more comprehensive treatment of which basis of accounting a company uses and how it affects the company's income statement and balance sheet appear in Figure 1 - Figure 3 . The figures also provide a detailed explanation by line item. 
section_title: Payment Received in the First Year—Income Statement and Balance Sheet Perspective for Figures 1-3
paragraphs: As previously discussed, the following examples ( Figure 1 - Figure 3 ) illustrate the difference between cash basis and accrual basis of accounting in determining the tax expense for ONSS. They also better illustrate how revenue, expenses, and earnings can be exaggerated and give a misleading impression of a company's performance under cash basis of accounting. 
 Figure 1 shows the beginning balance for ONSS. No transactions are recorded other than beginning cash balance and owners' equity. Transaction descriptions by line item for cash and accrual basis are provided below the financial statements.
 Figure 2 shows year-end financial statement for ONSS for the first year. ONSS provided the first year's service and incurred related expenses. It received the full payment for the two-year subscription from the client in January 2015. Taxes paid are higher under cash basis than accrual basis at the end of the first year because the company recognized the full amount of the payment as revenue. Transaction descriptions by line item for cash and accrual basis are provided below the financial statements.
 Figure 3 a shows year-end financial statement for ONSS for the second year, 2016. At this point, ONSS has provided the second year's service and incurred related expenses. Under cash basis of accounting, the company has no revenue and records a loss. The company's cash on hand and owners' equity also decreased as compared with the first year (see Figure 2 ). The deteriorating financial condition of the company under the cash basis could give the impression of a company in financial trouble, possibly going out of business. On an accrual basis, however, the picture looks quite different. Transaction descriptions by line item for cash and accrual basis are provided below the financial statements.
subsections: section_title: Outcomes
paragraphs: As shown in Figure 1 - Figure 3 , under cash basis, higher taxes were paid during the first year (2015), which resulted in less cash on hand at the end of the year. Both cash on hand and shareholders' equity declined by the end of the second year as compared with the first year, which could give the impression of a business in distress. The net result is the same under both the cash and accrual basis, as cash on hand and owners' equity are the same at the end of the second year (2016). Similarly, revenue, expenses, income, and shareholders' equity not recognized over the course of the first and second year under cash basis makes it harder for an investor or creditor to make an informed decision about the health of the business, as compared with accrual basis. 
section_title: Scenario 2: Payment Received in the Second Year
subsections: section_title: Cash Basis
paragraphs: ONSS provides service to the client for the first year (2015), but does not receive payment until the second year of the two-year commitment (January of 2016). At the end of 2015, ONSS has recognized no revenue but incurred $600 in expenses for a loss of $600. ONSS does not pay any taxes because it incurred a loss the first year. 
In 2016, ONSS recognizes $2,400 in revenue as the full payment was received in January 2016. ONSS incurs $600 in expenses for providing the service in 2016, resulting in income of $1,800 ($2,400-$600=$1,800). Because losses are deductible under IRC 172, ONSS carried the loss of $600 from 2015 forward. Taxable income in 2016 is $1,200 ($2,400-$600-$600=$1,200), which includes the expenses from both years. Taxes paid over the first two years total $120. ONSS's net income for the two years is $1,080.
section_title: Accrual Basis
paragraphs: ONSS provides its service to the client for the first year (2015), but does not receive the payment until the second year (January 2016) of the two-year commitment. ONSS keeps true to the matching principle of accrual accounting: even though it has not received any payment by the end of 2015, it recognizes revenue of $1,200 for 2015 because it has an expected receivable that matches the related expense of $600. At the end of 2015, ONSS has recognized $1,200 in revenue and $600 in expenses, for an income of $600. As ONSS has income at the end of 2015, it needs to pay $60 in taxes (10% of $600). Because ONSS has expended all of its cash by the end of 2015 to meet its operating expense, ONSS borrows $60 in cash from a lender to pay taxes. After paying for the expenses incurred in the first year and paying taxes, ONSS has net income of $540 ($1,200-$600-$60=$540) in 2015.
ONSS receives the full payment ($2,400) from the client in January 2016. Under accrual basis of accounting ONSS only recognizes revenue for which it has incurred expenses in 2016; ONSS therefore recognizes $1,200 in revenue and $600 in expenses for an income of $600. ONSS pays $60 in taxes (10% of $600). After paying for the expenses incurred in 2016 and paying taxes, ONSS has net income of $540 ($1,200-$600-$60=$540) in 2016. Taxes paid for the two years total $120. Net income for the two years for ONSS is $1,080. Similar to when payment is received in the first year, when payment is received in the second year, taxes and net income are the same as under cash basis over the life of the subscription.
section_title: Payment Received in the Second Year—Income Statement and Balance Sheet Perspective for Figures 4-6
paragraphs: One objection raised by the industry to proposed tax reforms concerns the allowable methods of tax accounting; that is, whether these can compel a business to borrow cash to meet tax expenses in addition to operating expenses. The tax reform proposals discussed here would require certain businesses with revenues in excess of $10 million to use accrual basis instead of cash basis of accounting. The basis of accounting used to determine taxable income and taxes paid can affect a company's cash flow through the timing of when taxes are paid. Figure 4 - Figure 6 illustrate that a company without sufficient cash that is required to use accrual basis of accounting would need to borrow cash to meet its financial obligations, including its operating and tax expenses. 
It should not be construed from this example that businesses in a similar position would need to borrow money strictly to meet their tax expenses. Arguably, a business that does not have sufficient cash is likely to borrow money to fund its ongoing operating expenses, and any tax expense would be part of the overall consideration of maintaining cash liquidity in the normal course of business.
 Figure 4 shows the beginning balance for ONSS. No transactions are recorded except for beginning cash balance and owners' equity. Transaction descriptions by line item for cash and accrual basis are provided below the financial statements.
 Figure 5 shows the year-end financial statement for ONSS for the first year. ONSS has provided the first year's service and incurred the related expenses but has not received any payment. The company borrows cash to meet its operational and tax related expenses under accrual basis of accounting. Transaction descriptions by line item for cash and accrual basis are provided below the financial statements.
 Figure 6 shows year-end financial statement for ONSS for the second year. ONSS has provided the second year's service and incurred the related expenses. ONSS received full payment in January 2016 for the services provided in year one (2015) and year two (2016). Transaction descriptions by line item for cash and accrual basis are provided below the financial statements.
subsections: section_title: Outcomes
paragraphs: As shown in Figure 4 - Figure 6 , under cash basis, no taxes were paid during the first year (2015), since ONSS did not receive the payment until the second year. Both cash on hand and shareholders' equity declined to $0 at the end of the first year under cash basis. Under accrual basis, at the end of the first year cash declined to $0 but shareholders' equity increased to $1,140, even though payment was not received until January of the second year, as revenue, expenses, and income were recognized and taxes on income earned were paid. Similar to the examples in Figure 1 - Figure 3 , the net result is the same under both the cash and accrual basis, as cash on hand and owners' equity are the same at the end of the second year (2016). Taxes paid under both bases of accounting over the long run were the same. Tax deferral may allow a company to delay paying taxes until a future date and have those funds available to increase its profitability in the short run.
section_title: Conclusion
paragraphs: The previous discussions highlighted the key differences between cash and accrual basis of accounting. Cash basis is simpler for record keeping but arguably, the process of matching revenue and expenses under accrual basis accounting leads to a better understanding of the financial condition of a business compared to the results under cash accounting. The consistency of matching revenue with expenses under the accrual method provides a more consistent treatment of economic events and helps principals to make informed financial and operational decisions. 
Chairman Camp's Tax Reform Act of 2014 ( H.R. 1 ) proposes changes in accounting rules for tax purposes; under the legislation certain partnerships, S corporations, and PSCs with average gross receipts in excess of $10 million would be required to use the accrual method. The accrual method more accurately reflects the revenue and expense items used to generate income in the taxable year, not merely the cash flows occurring within the period. According to the legislation businesses with average gross receipts of less than $10 million could use the cash method as it is easier for record keeping and requires less effort. Changing from the cash method to accrual method could cause taxpayers to recognize income as a result of the change in accounting methods. Taxes paid on this income would increase federal revenues. Changing the timing of when income is recognized could also accelerate or defer tax liability. A deferral decreases the real value of tax payments over time, due to the time value of money. 
As the examples above illustrated, over the long run, if tax policy does not change, the amount of taxes collected will remain the same, but the timing of collection will be different. Arguably, in some circumstances, paying taxes on revenue and income earned without having received the payment for the services provided or product shipped involves risk and can jeopardize a business's financial health. 
Although the accrual basis of accounting captures a more complete financial picture of the U.S. government's future liabilities and revenues, the focus of governmental reporting is different than that of a profit-oriented business. A business relies on its assets to help generate future income and cash, whereas the government relies on tax revenue (or cash receipts) to provide services to its citizens. Arguably, a government's effectiveness can be assessed based on the quality of services provided to its citizens rather than by the revenue it generates from using its existing assets. Reporting in both the cash basis and accrual basis of accounting might provide the executive branch, Congress, and U.S. citizens with a more informative picture of the government's performance and future obligations than relying only on the cash or modified cash basis of accounting.
subsections: section_title: Appendix. Definitions: Principles, Concepts, and Terminology
paragraphs: Different stakeholders of an organization rely on financial statements to make informed decisions; they expect the financial statements to have certain characteristics for the information to be useful. Although the accounting principles, concepts, and terminology listed below can be applicable for accrual and other bases of accounting, they are the foundational building blocks of accrual accounting. This is not a comprehensive list of principles, concepts, and terminologies in the field of accounting. 
Concepts and Terminology
Realization . The recognition of revenue when the product is delivered or a service is completed, without considering if the payment (cash) has been received.
Matching . The recording of revenue and related expenses in the same period. This assumption is based on a cause-and-effect relationship: expenses are incurred in generating the revenue, thus they should be recorded in the same period.
Relevance . The capacity for information to make a difference in a decision. The information should have both confirming and predictive values. Confirming value should help the users of the financial information confirm or correct any past predictions they have made. Predictive value should help users of financial information forecast future trends for a business.
Materiality . The degree to which an omission or a misstatement of financial information will affect the judgment of someone using the information.
Conservatism . The practice of using the lower estimated value when two estimated amounts are likely for an asset. Conversely, for a liability, the practice of clearly stating the amount likely to be paid in the future.
Comparability and Consistency . Allow users to compare and analyze financial information from one period to the next. Comparability and consistency can be ensured by applying similar accounting principles to like items from one period to the next. 
Financial Statements
Income Statement . Summarizes and communicates all the revenues that a company has earned during a specific period of time less all the expenses incurred in generating that revenue, usually for a quarter or a year.
Balance sheet . Communicates the financial position of a company at a specific point in time, such as at the end of a quarter or a year. It is divided into assets, liabilities, and owners' equity (stockholders' equity).
Statement of Changes in Owners ' Equity . For large businesses with multiple shareholders, this is often called the statement of changes in stockholders' equity. It shows the changes in owners' equity of the business entity during the same period of time as measured by the income statement. It is used to communicate the change between the amount of owners' equity of a business at the beginning of the accounting period and the amount of equity at the end of the period. The statement takes into account such things as increases in equity from issuing stock, repurchase of company stock, net income or net loss, and decrease in equity from dividends. 
Statement of Cash Flows . Shows the amount of aggregate cash inflows and outflows for a company during a specific period of time, usually for a quarter or a year. 
Financial Statement Categories
These are listed in the order they appear in Figure 1 - Figure 6 . Some of the line items are not listed in all statements because only the relevant line items are normally listed in each set of financial statements. 
Income Statement—Line Items
Revenue . The increase in net assets resulting from selling products or services. Revenue is also identified as sales or sales revenue. 
Expenses . The use of resources (assets) by a company in the process of providing products or services to a customer, including spending cash. 
Income (Loss) . The excess of revenue over expenses. Loss results from higher expenses than revenue. 
Operating Income . Gross profit less all operating expenses. Operating income is pretax income. Operating income is not a line item listed on the financial statements in Figure 1 - Figure 6 .
Net Income (Net Loss) . The difference after deducting all expenses, including taxes, from revenues. Net loss is the difference between revenue and expenses, including taxes, when expenses exceed revenue. 
Loss Carry Forward . The carrying forward or back of a Net Operating Loss (NOL) in the current year to determine taxable income in future or previous years.
Balance Sheet—Categories
Assets . Cash and any economic resources of a company that generate future cash inflows or reduce future cash out-flows. 
Liabilities . Obligations of a company to outsiders or claims against the company's assets. 
Owners' Equity . The owners' claims on a company's assets. Owners' equity is the value of assets less liabilities.
Balance Sheet—Line Items
Cash . The most liquid asset on a balance sheet. 
Receivables . The amount owed to a company by customers as a result of the company delivering goods or providing services. 
Payables . The liability a company incurs from the purchase of goods or services. Cash loan payable listed in Figure 5 is cash that is owed to a creditor. 
Deferred Revenue . The liability a company incurs owing customers goods and services it has not yet provided.