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Chapter 6
The Three Concepts That Explain Unexpected Numbers
I paid $60,000 in January. My P&L shows $5,000. Where's the rest?
22 min read
This is real
"Helen pays a $60,000 annual software licence in January. Her P&L shows $5,000. She thinks finance lost $55,000. They didn't."
— Helen, Technology Director
Key concepts
Concept 1
Accrual
Costs appear when incurred, not when paid. Revenue when earned, not when banked.
Concept 2
Matching
Spread costs across the period they serve. That's why Helen's annual licence shows as $5,000/month.
Concept 3
Materiality
Size determines treatment. Small items can be expensed; large ones must be spread.
Flashcard deck
Tap a card to flip.
Knowledge check
Q1
Why does Helen's $60,000 licence show as $5,000?
Q2
Accrual accounting records costs when:
Q3
Materiality means:
Red flag alert
P&L profit strong but cash is tight → receivables problem. Check the ageing report.
Questions to ask your finance team
- 1.What is our capitalisation threshold?
- 2.Can you show me which of my team's costs are being accrued or prepaid this month?
- 3.If I need to move a cost from one month to another, what's the process?