It is the first week of December and Bill already knows he is going to overspend. Not because he is careless. Because Christmas has a logic of its own: gifts for the family, the work dinner, the train home, the contribution to the shared celebration that no one explicitly agreed to but everyone implicitly expects.
He sets a rough limit in his head: 300 euro. He does not write it down.
Accruals are costs that have been incurred but not yet paid. In December, Bill is accumulating obligations before the cash leaves his account. The gifts he plans to buy, the dinner reservation he has already made, the train ticket he has not purchased yet: these are liabilities that exist today even though the bank statement does not show them. His account looks healthy. His December is not.
The accrual principle would have shown him the gap in the first week of December, before any money moved. The cash principle showed him the gap on the 27th, when it was too late to change anything.
By the 27th of December, he has spent 420 euro. Not 300. The 120 euro of variance came from a gift he upgraded at the last minute, a round of drinks on Christmas Eve, and a contribution to a family dinner that was supposed to be informal.
He closes December with 2,970 euro in cash. It is less than he planned. It is more than he started the year with.
The tip
List every planned December expense before the first one is paid. What you write down before the month starts is the accrual. What the bank shows at the end is the cash reality. The gap between the two is the cost of not planning.
Accruals, December 2024: planned Christmas spend 300, actual 420. Variance: -120. FY 2024 closing cash position: 2,970. Net worth at year end, smartphone book value included: 3,315.
Bill is 24. He has just started his first job. Every episode, we read his personal ledger through accounting eyes. / FY 2024 ledger