Select 2025, 2026, and 2027 and compare the $2,400 policy under each basis.
FastForward paid $2,400 on December 26 for two years of insurance. By December 31, one month of coverage is gone — but the check was written for the whole 24 months. Reporting the entire $2,400 as December's expense would overstate December's cost and understate every month after.
That is why accounting cuts a business's life into — usually a of twelve months, sometimes a shorter period — and requires : record revenue when it is earned and expense when it is used up, not when cash happens to move. December's insurance expense is $100, one month's share, regardless of when the check was written.
The is what makes any of this necessary: a company's life can be cut into periods and reported on before the company is done operating. Two principles then decide the timing. The says record revenue when the work is delivered, at what you expect to collect. The (the matching principle) says record an expense in the same period as the revenue it helped produce. A is one variation on the fiscal year: it ends when a company's sales are lowest, so counting inventory is easiest.