Why is the result not the same as the money in the account?

The result and the bank balance measure two different things. Accruals place income and costs in the period they economically belong to, not in the month the money moves. A company can therefore have a large profit and an empty account, or plenty of money and a loss. Accounting and tax also do not always follow the same timing principle.

What accruals mean

Accrual accounting means income and costs are placed in the period they economically belong to, and not necessarily in the month the money is paid. The earnings principle: income is recognised when it is earned. A consultant can have income in December even though the customer pays in January. The matching principle: costs are recognised in the same period as the related income. That is one reason goods still in stock at the year end are not fully expensed – see Inventory at the year-end close Small entities can use certain simplifications where good accounting practice for small entities allows it.

A high result and an empty account

Typical reasons: customers have not paid yet, the company has bought fixed assets, money is tied up in inventory, or the company has repaid loans. What those four have in common is that the money has been spent or has not come in, while the result has been earned. That is also why a company can have dividend capacity on paper and be unable to pay the dividend – see Dividends from your own AS

A full account and a weak result

Typical reasons: advance payments from customers, new loans, capital contributions, or supplier debt not yet paid. None of those is income. An advance payment is a liability to the customer, not a gain.

The four common accrual items

Prepaid costs. Pay NOK 120,000 of insurance on 1 October for twelve months and only three months belong to the current year. The rest sits as a prepaid cost. Accrued costs. A December cost may have to be booked in December even though the invoice arrives in January. Earned but uninvoiced income. Work done in December can be December income even though the invoice goes out in January. Income received in advance. The mirror image: paid in December, earned in January.

Salary, holiday pay and bonuses

Accrued holiday pay and the related employer's contributions are normally recognised in the accrual year – the year before they are paid. See Holiday pay A bonus has to be assessed on whether the business actually has an obligation at the year end. A bonus the board only resolves in March is not necessarily a December cost.

Result, cash flow and the bank are three different things

The result shows income less costs. Cash flow shows actual receipts and payments. The bank balance shows money at a point in time. There is no simple universal formula that makes the three identical. That is precisely why medium-sized and large entities have to produce a cash flow statement – it explains the distance.

Cut-off at the year end

At the close the business should check sales and deliveries around 31 December, incoming invoices in January, timesheets, inventory, the bank, accrued costs and earned but uninvoiced income. That is the check that decides whether the income landed in the right year – and it has to be done on both sides of the year end.

Accounting and tax accrue differently

For accounting, the earnings and matching principles apply. For tax the general rule is the realisation principle: income is allocated as a general rule when the business acquires an unconditional right to the consideration, and a cost when it takes on an unconditional obligation. Accounting accruals therefore do not automatically decide the tax timing. It is the same principle that makes a dividend taxable on the resolution date and a share gain taxable when the right to the consideration becomes unconditional – see Loans from your own company

Errors from earlier years

For entities other than small ones, material errors from earlier years are normally corrected against equity, with restated comparative figures. Small entities have simplifications and can, on the conditions in the Accounting Act, take the correction through profit or loss. Where income or a cost has been reported in the wrong year for tax, the tax return for the correct income year has to be considered for correction – not the current year. See The tax return for businesses We can handle accruals, cut-off, the year-end close and checking the correct tax timing.

This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.

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