Accrual vs cash accounting in plain English: which lens your small shop is actually using.

Cash basis records revenue when the money lands in your bank and records cost when the money leaves. Accrual basis records revenue when the work is done (the coffee is poured, the dress is handed over, the haircut is finished) and records cost when the supplier delivers the goods, even if the invoice is not paid for 30 days. Most micro-operators run cash basis by reflex — it matches the bank account, it is hard to lie to yourself with it, and almost every café, salon and small retail shop where the customer pays at the till is naturally cash-basis. Most accountants and most tax authorities above certain thresholds want accrual — it smooths the P&L, matches each period to the work it actually did, and produces the kind of report banks and lenders read. The two lenses give different answers about the same week. Knowing which one you are using is the difference between interpreting your daily EBIT correctly and being quietly wrong about whether last week was profitable.

TL;DR

• Cash basis: the natural way most owner-operators already work. Bank balance up = revenue. Bank balance down = cost. Same-day at the till makes the two views collapse into one.
• Accrual basis: the rigorous way most accountants work. Revenue on the day delivered, cost on the day incurred. Cash flow and P&L become two separate statements.
• Where they diverge: credit terms to customers, unpaid supplier invoices at month-end, prepaid subscriptions, and inventory purchases all open a gap between the two answers.
• What triggers a switch: hitting a revenue threshold (varies by jurisdiction — check your local rules), incorporating, hiring employees, taking institutional financing.
• The trap: running cash-basis daily intuition while your accountant runs accrual-basis tax compliance — without realising the two reports will never quite agree, and that the gap is the cost of unpaid invoices, prepaid subscriptions and inventory sitting on the shelf.

You are almost certainly already on cash basis

If you run a café, a salon, a single-location boutique or a small online shop where the customer pays at the till (cash, card, Apple Pay), almost everything you do is cash-basis by default. The customer paid you. The money landed in your account (instantly for cash, in 1–3 business days for card). You logged it as revenue. You bought milk on Tuesday with the card; the bank account dropped €58; you logged €58 of cost on Tuesday. That is cash accounting — you just never called it that.

The reason cash basis feels natural is that for a retail-front operation, money moves the same day the work happens. There is no meaningful gap between "I delivered the coffee" and "I got paid for the coffee" — both happen at 9:47 a.m. when the customer taps. So the question "when do I log this?" has a trivial answer: when it happened. Cash and accrual would record the same revenue on the same day in 95% of your sales.

The gap opens for the 5% of cases where money and work are out of sync. A 30-day net invoice to a corporate catering client. A six-month gym membership prepaid in January. A supplier invoice for August's flour delivery that does not get paid until September 15. An inventory order of €4,200 of seasonal stock that sits in the back room for two months before any of it sells. In those cases — and only those — cash and accrual give meaningfully different pictures of how a given month performed.

This article is about what those differences are, when they matter, and how to keep your daily operating P&L useful even if your accountant's books are running on a different basis. The short version: it is fine to run both, and most owners already are.

Cash basis — the simple version

Cash basis is the way a kitchen-table business naturally thinks. Money came in? That is revenue, on the day it landed. Money went out? That is expense, on the day it left. The bank statement and the P&L are essentially the same document with the rows rearranged.

The mechanic, plainly:

• Revenue is recorded on the day the money settles into your account. A €4 coffee paid in cash is revenue today. A €120 dress paid by card today shows up in the bank tomorrow — but most cash-basis operators log it today anyway, because the sale happened today and the card delay is just a settlement timing artefact. The strict cash-basis view would log it on the settlement day; the pragmatic small-shop version logs it on the sale day because that is when the trade actually happened.
• Cost is recorded on the day the payment leaves your account. €58 of milk bought on Tuesday is a €58 cost on Tuesday. The €1,800 accountant invoice paid in February is a €1,800 cost in February — even if it covers twelve months of work. The €2,400 espresso machine paid up front in cash is a €2,400 cost today.
• Receivables (money owed to you but not yet collected) do not exist in the P&L. An invoice you sent on the 28th for €1,400 net-30 is invisible until the customer pays in March.
• Payables (money you owe but have not yet paid) also do not exist. A supplier invoice received but not paid is not a cost yet.
• Inventory is expensed when you buy it. €1,200 of wholesale stock bought on the 14th is a €1,200 cost on the 14th — even if none of it sells until next month.

Cash basis is honest about one thing the accountant's books are not: it tells you the truth about the bank balance. You cannot lie to yourself about how much money you have, because every entry corresponds to an actual movement in the account. There is no inventory line you are still trying to sell, no "accrued revenue" that is technically yours but has not arrived yet. Money in is in; money out is out.

It is also the easiest basis to run without bookkeeping training. No journal entries, no accounts receivable schedule, no deferred revenue reconciliation. Below certain revenue thresholds in most jurisdictions, cash basis is a legitimate tax-filing method — the law accepts that for a small enough operation, the simplicity is more important than the precision. Above those thresholds, the tax office switches and requires accrual.

Accrual basis — the accountant version

Accrual basis is more rigorous. Revenue is recognised when the work is done — when the service was delivered, when the product physically left the shop, when the contract was fulfilled. Cost is recognised when the resource was consumed or the obligation was incurred — when the supplier invoice landed, when the rent month elapsed, when the equipment wore out. Whether the cash has actually moved is a separate question, answered by a different statement (the cash flow).

The same five lines, on accrual:

• Revenue is recorded on the day the work is delivered. The €4 coffee handed over at 9:47 is revenue at 9:47 regardless of when the card settles. The €1,400 net-30 invoice sent on January 28 for catering delivered that day is revenue in January — even though the cash will not arrive until late February.
• Cost is recorded on the day the resource is consumed. The €1,800 accountant invoice paid in February that covers twelve months of work is recognised as €150 of cost per month, for each of the twelve months. The €2,400 espresso machine is depreciated over its useful life — say €40 per month for 60 months — not expensed in one hit.
• Receivables sit on a balance sheet as an asset. The €1,400 net-30 invoice is "money the business has earned but not yet been paid" — real economic value, even though the cash has not landed.
• Payables sit on a balance sheet as a liability. The supplier invoice received but not paid is "money the business owes" — real economic cost, even though the cash has not left.
• Inventory is held on the balance sheet at cost until it sells. The €1,200 of wholesale stock bought on the 14th becomes a €1,200 inventory asset, not an expense. As pieces of it sell, the cost moves from inventory to COGS — line by line, sale by sale.

The reason accountants reach for accrual is that it gives you a cleaner answer to the question "did the business get richer this month?" — separate from the question "did the bank balance go up this month?" Those are different questions, and for any business with credit terms, prepayments or inventory, the answers diverge. Accrual is the basis required by most national tax codes above a turnover threshold, and it is the basis used in every formal P&L statement that a bank, an investor or a buyer would read.

The cost of accrual is that it requires bookkeeping discipline. You need to track receivables, payables, prepaid expenses and inventory as separate ledger accounts. You need to know which month each invoice "belongs" to (the month the work happened, not the month the invoice was paid). You need to slice annual costs into monthly amounts and prepaid revenues into the periods they cover. None of this is hard with software and an accountant, but it is more than typing numbers into a bank-balance spreadsheet.

Worked example: what each basis says about February

Numbers make this concrete faster than definitions. Suppose a catering-and-events business has the following February. Real shop, made-up numbers, illustrative on purpose:

• €18,000 of services delivered during February — events catered, courses run, products handed over. Of that, €13,800 was paid at the time (cash, card, immediate bank transfer) and €4,200 was billed on 30-day net terms to two corporate clients and will not arrive in the bank until late March.
• €3,400 of January receivables — invoices for January work — landed in the bank in February, paid by clients on their normal 30-day cycle.
• €7,200 of supplier invoices received during February for goods and services consumed in February. €5,100 paid the same month; €2,100 sits unpaid on the desk at February 28 (standard 30-day supplier terms).
• €1,800 paid up front in February for the annual accountant fee covering the whole tax year.
• €2,400 of inventory purchased on the 14th — seasonal stock for a spring promotion. €600 of it sold during February; €1,800 of it is still on the shelf at month-end.
• €2,800 of fixed costs paid in February (rent, salaries, insurance, software) — all relating to February.

Two completely different P&Ls fall out, depending on which lens you read it through:

February cash-basis profit: €5,100. February accrual-basis profit: €7,250. The two numbers disagree by €2,150 — about 30% of the cash answer — and neither one is wrong. They are answering different questions.

The cash view is honest about what happened in the bank. €17,200 of money came in (from a mix of January and February work); €12,100 of money went out (on a mix of February consumption, prepaid annual fees, and stock that has not sold yet). The bank balance rose by €5,100. That is real and operationally important — it is what determines whether you can pay next month's rent.

The accrual view is honest about what the February operation actually earned. €18,000 of work was delivered. €7,200 of supplier cost was consumed (whether paid or not). €150 of accountant fee was used (1/12 of the annual). €600 of inventory was sold. €2,800 of fixed costs were incurred. The operation produced €7,250 of profit that month — which is what your accountant would put in the formal P&L for February if anyone asked.

A year of months like this builds up a meaningful divergence between the two reports. The cash report under-states profit in months where receivables grew (you delivered more than you collected) and over-states profit in months where payables grew (you incurred more cost than you paid). Across a full year of stable trading the two converge — but in any given month, a 20–40% gap between cash and accrual profit is normal for a business with credit terms, prepayments or inventory.

The four cases where they diverge most

The February example bundled several gaps into one month. In day-to-day operation there are four distinct cases that drive almost every divergence between cash and accrual answers. Knowing which ones apply to your shop tells you how meaningful the gap will be for you specifically.

1. Credit terms to customers

Any time you do work today and the customer pays later, cash and accrual disagree about which month the revenue belongs to. Cash says: the month the cash arrived. Accrual says: the month the work was delivered. For a café where every transaction settles in seconds this never matters. For a catering business, a hairdresser doing corporate events, a boutique with wholesale accounts, or any operator who sends invoices with net-7, net-14 or net-30 terms, this is the largest single source of the gap.

Practical rule: if more than 5% of your revenue runs through invoices with payment terms longer than one week, the cash-vs-accrual difference is large enough to matter for monthly comparisons. Under 5%, the gap is noise and either basis tells you roughly the same story.

2. Supplier invoices unpaid at month-end

The mirror image of customer credit terms. If your suppliers extend you 30 days to pay, then at the end of any given month there are invoices for goods and services you already used but have not paid for yet. Cash basis ignores them (no money has moved). Accrual basis treats them as costs of that month (the resource was consumed). For most small shops this gap is significant — a typical café or boutique has €1,500–€5,000 of unpaid supplier invoices on any given month-end. That is the size of the gap between cash and accrual on the cost side.

Practical rule: if your "accounts payable at month-end" varies a lot from month to month, your cash-basis profit will swing more than your accrual-basis profit. Smooth months on accrual will look spiky on cash.

3. Prepaid subscriptions, insurance and annual fees

Anything you pay up front for a longer service window — annual accountant fee, six-month insurance premium, twelve-month software subscription, three-year domain registration — creates a single cash hit on the day of payment and a steady monthly cost over the service window on accrual. The €1,800 accountant fee in our February example is a €1,800 cash cost in February and a €150 accrual cost in each of twelve months. Across a year the two reconcile. In any single month the gap can be material.

Practical rule: list every annual or multi-month prepayment your shop makes. Divide each by the months it covers. The total is the size of the gap between cash and accrual on these specific lines every single month.

4. Inventory purchases

When you buy stock, cash basis treats the whole purchase as an expense on the day you paid the supplier. Accrual basis holds the cost on the balance sheet as inventory and only recognises it as expense (specifically, as COGS) as each item actually sells. For shops with high inventory turnover relative to revenue (cafés, where stock moves in days) the gap is small. For shops with slow-moving inventory (boutique fashion, where stock might sit for weeks; speciality retail with seasonal cycles; e-commerce with bulk purchasing) the gap can be very large in months when you stock up and very negative in months when you sell down.

Practical rule: if you ever make a stock-up purchase of €2,000+ in a single month, your cash-basis P&L for that month will under-state profit by close to the full purchase value, then over-state profit in subsequent months as the stock sells. Accrual smooths this; cash does not. The COGS snapshot explainer covers how nouz handles cost-at-sale to keep the per-day operating picture honest even though the daily P&L is structurally cash-basis.

Why your accountant probably wants accrual

Accountants reach for accrual by training and by law. Four reasons in particular drive it.

One: it matches revenue to the period it was earned. If you catered a wedding on January 28 and the client paid you in late February, cash basis records that as February revenue — which is misleading because the wedding actually happened in January. Accrual records it in January. When the question is "how did January perform?" accrual gives the honest answer. This matters for any analysis of trends, seasons, marketing campaigns or pricing decisions, because cash-basis monthly numbers are distorted by payment-timing noise that has nothing to do with the underlying trading.

Two: it smooths P&L volatility. A month with three large prepaid annual invoices looks like a disaster on cash basis and a normal month on accrual. A month with three large stock-up purchases looks like a disaster on cash and unchanged on accrual. The smoothing is not a cosmetic trick — it reflects the underlying reality that those big cash hits actually benefit many months, not just the one they were paid in. Accrual amortises that benefit over the right periods so you can see what was actually going on operationally.

Three: it is required by tax law above certain thresholds. In most jurisdictions, sole proprietorships and very small businesses can elect cash-basis tax filing up to a revenue threshold (the threshold varies meaningfully by country — check your local rules). Above that threshold, accrual is mandatory for the tax return. Incorporated entities are usually required to file on accrual regardless of size. Your accountant defaults to accrual because for most clients above a certain size it is not optional.

Four: it is what banks and investors read. Any formal P&L statement — the one a working-capital lender wants to see before approving a loan, the one a buyer wants to see during a due-diligence process, the one a landlord wants to see when you renew a lease — is structured on accrual. Banks and investors expect to see "Revenue €X, COGS €Y, Gross Profit €Z, Operating Expenses €A, EBIT €B" with each line reflecting the period the activity actually happened. A cash-basis P&L looks unprofessional to them because the line items are distorted by payment timing.

None of this means cash basis is wrong. It means accrual is the standard format for external reporting, and your accountant is right to use it for the books that get filed and shown.

Why most operators want cash

Operators — the people running the till, ordering the milk, deciding whether to open on Sunday — overwhelmingly reach for cash basis when it is their own decision. Three reasons.

One: it matches the bank account. The bank balance is the single most important number to a small-shop owner, because the bank balance is what determines whether the business can pay next week's bills. Cash basis keeps the P&L and the bank account in lockstep — every entry corresponds to a real movement, and a healthy cash-basis profit means the bank balance actually grew. Accrual can show a healthy profit while the bank account quietly shrinks, because the profit is sitting in receivables and inventory that have not converted to cash yet. For owners running close to the line, that disconnect is dangerous.

Two: it is easier to understand without training. Cash basis requires no concept of receivables, payables, deferred revenue, accrued liabilities or inventory accounting. Money in is revenue; money out is cost; the difference is profit. Anyone can read it. Accrual requires understanding why an unpaid supplier invoice is a cost or why an unsold piece of stock is not. Most owner-operators do not want to learn that just to read their own P&L, and they should not have to.

Three: it is harder to lie to yourself with. Accrual lets you book €18,000 of February revenue when only €13,800 actually arrived — and feel like the business is in a stronger position than it is. Cash basis tells you the truth: €17,200 came in this month, including some January receivables. The "richer on paper, poorer in the bank" feeling that comes from optimistic accrual reporting is responsible for a lot of cash-flow surprises in small businesses. Cash basis makes that impossible — there is no version of cash-basis profit that does not correspond to money actually in the account.

There is a fourth reason that does not get said out loud: cash basis is what most operators are already running, even if they would not have called it that. Logging numbers on the day money moves is the natural reflex. The choice to switch to accrual is almost always driven by external pressure — a lender, a tax threshold, an accountant — not by an operator deciding their decisions would be better on accrual.

When you have to switch (and what triggers it)

Cash-basis filing is allowed for small businesses below certain thresholds in most jurisdictions, but every jurisdiction sets its own line. Rather than guess at a number that will be wrong somewhere, here is the generic framing: there are usually four triggers, and hitting any one of them typically requires switching to accrual or hiring an accountant who runs accrual on your behalf. The exact numbers vary by country — check your local rules with a local accountant rather than relying on any web article.

One: revenue threshold. Most jurisdictions allow cash-basis filing up to a turnover ceiling. Below the ceiling, cash is allowed and often the default for sole proprietorships. Above the ceiling, accrual becomes mandatory for the tax return. The ceiling varies enormously between countries — what is "small" in one tax code is "medium" in another. If your annual revenue is growing past the size of "small kitchen-table business" into the size of "small but real company with employees and a lease," it is worth asking your accountant where the threshold sits in your jurisdiction.

Two: incorporation. Sole proprietorships often qualify for cash basis. Corporations (Ltd, GmbH, SAS, BV — whatever the local equivalent is) typically do not, regardless of size. The moment you incorporate, the rules usually change. If you are considering incorporating for liability or tax reasons, factor in that your books will likely need to move to accrual at the same time.

Three: hiring employees. Once you have employees on payroll (as distinct from yourself drawing from the business, or from hiring contractors), the bookkeeping requirements typically tighten. Payroll, employer-side social contributions, holiday accruals, sick-pay liabilities — all of these are accrual concepts. The tax authority generally expects accrual treatment of payroll-related liabilities. You can still file revenue on cash if you are below the threshold, but the payroll side is almost always run on accrual.

Four: institutional financing. The moment you apply for a bank loan, a working-capital line, an investor round or a serious lease, the counterparty will ask for accrual-basis financials. They do not care whether you also keep cash-basis books for your own purposes; they want the standard format. If raising external capital is on the roadmap within the next year or two, switching to accrual now (or having your accountant maintain accrual books in parallel) makes the conversation faster when it happens.

How nouz handles this

nouz runs the daily P&L on cash-basis logic by default. Specifically:

1. Revenue is recorded on the day you log it. If you enter "€1,247 of revenue today," that is today's revenue. The default expectation is that revenue is being logged when money moved — which for a same-day till operation (café, salon, retail front, e-commerce checkout) is also the day the work was delivered.
2. Costs (variable, COGS, fixed-cost slice) are recognised on the day they are entered or on the day they fall due according to the fixed-cost schedule. There is no concept of an unpaid invoice sitting in the system as a future liability — when you log a cost, it is a cost on that date.
3. Fixed costs are sliced into daily amounts (monthly total ÷ 30.4375) and applied to every day in the active window — a hybrid that is technically accrual-style for fixed costs even though the rest of the system runs cash. This is intentional: it would be operationally useless to ignore rent on the 29 days a month it is not paid and dump it all on the 30th. The fixed-cost explainer walks through the daily-slice logic in detail.
4. COGS is snapshotted at the moment of sale — the cost of the items sold today is captured today and never silently rewritten by a future product-cost edit. This is also accrual-flavoured in the sense that it matches cost to revenue at the moment of the trade rather than at the moment of the supplier invoice. The COGS snapshot explainer goes deeper.

Why this hybrid? Because the alternative — pure cash basis with no fixed-cost slicing and no COGS-at-sale — would produce a daily P&L that swings violently with whatever happened to be paid that day, and would not let you compare Tuesday to last Tuesday in any meaningful way. The pragmatic answer for daily operating numbers is: revenue and variable costs on the day they happen (cash-basis), fixed costs sliced evenly across days (accrual-style), and COGS captured at the moment of sale (accrual-style). The result behaves like cash for decision-making (the bank account and the P&L tell roughly the same story) while behaving like accrual for cost matching (the rent slice never disappears just because rent day was last week).

Owners who want to mirror accrual treatment can do so by changing how they log revenue: instead of logging when cash settles, log on the day the work was delivered. For a catering or services business with invoice-and-wait revenue, this means entering the €1,400 invoice as revenue on the day the event happened, not the day the customer paid 30 days later. nouz does not enforce this either way — the entry date you choose is the date the revenue lands in the P&L. Cash-basis owners log when paid; accrual-flavour owners log when earned. The tool supports both.

For shops with significant invoice-and-wait revenue (catering, B2B services, wholesale-to-retail), the gap between what nouz shows and what the accountant's monthly P&L shows can be material. The reconciliation is not difficult — you sum nouz's revenue for the month, your accountant compares against accrual-basis revenue, and the variance is the net change in receivables that period — but it is worth doing once a quarter so you understand which lens you are looking through when you read the daily number.

Why this matters even if your accountant handles the books

A common reaction to all this is: "my accountant handles the accounting; why should I care?" Two reasons, both operational.

One: your daily operating P&L should match your operating intuition. When you close the till on Tuesday and the P&L tells you Tuesday made €240, you should be able to feel that in the bank balance over the next 1–3 days. If the tool says Tuesday made €240 but the bank actually only rose €180, the gap is information — usually a card-fee deduction, a refund processed, or a timing artefact. You learn to interpret it. If the daily P&L is running on accrual and includes revenue from invoices you sent but were not paid, you cannot feel the gap as easily because the €240 includes money that has not arrived. Cash-basis daily numbers stay closer to operating intuition for owner-operators who run from till to till.

Two: knowing which lens you are using lets you read the daily EBIT correctly. If you know your daily P&L is cash-basis, you know that a month with a big stock-up purchase will look worse than it actually was operationally — and you can mentally adjust ("this is a stock-up dip, not a margin problem"). If you know your accountant's monthly P&L is accrual, you know that a month showing €7,250 of profit while the bank only rose €5,100 has the missing €2,150 sitting in receivables and inventory — and you can plan cash accordingly. The trap is not which basis you use; the trap is using one without realising it and being confused when the numbers do not behave as expected.

A useful habit: once a quarter, ask your accountant to send you the accrual-basis revenue and accrual-basis operating profit for each month of the quarter. Compare against the cash-basis sums from nouz for those same months. The variance tells you how much your operation is moving between the two lenses. For shops with same-day revenue and steady supplier payments, the variance is small (under 5%) and either lens gives the same management story. For shops with credit terms, prepayments or slow-moving inventory, the variance can be 15–30% — large enough that decisions made on one lens would be different from decisions made on the other.

The daily routine, knowing which lens you are using

In practice, this whole accrual-vs-cash question collapses to a one-time decision and a small daily habit. The decision: are you logging revenue on the day cash settles, or on the day work is delivered? Pick one and be consistent. The habit: at close-out, enter today's revenue and costs on the basis you picked.

1. For a same-day till operation (café, salon, retail front, e-commerce checkout): the question is moot. Cash and accrual produce the same answer for 95% of your trade. Log revenue when the sale happens (which is when cash settles for cash, and within 1–3 days for card — the gap is too small to model). Log variable costs when they happen. Let fixed-cost slicing and COGS-at-sale handle the accrual-style smoothing automatically.
2. For a services-and-invoices operation (catering, B2B services, wholesale-to-retail, consulting): the question matters. Pick "log on delivery" (accrual-flavour) if you want monthly numbers that reflect the work the business actually did. Pick "log on payment" (cash-basis) if you want monthly numbers that reflect the cash that actually arrived. Either is defensible; mixing them inside the same month produces nonsense.
3. For a mixed operation (services with some same-day, some invoiced): log same-day revenue on the day it lands. For invoiced revenue, pick one rule (delivery date or payment date) and apply it consistently. Resist the temptation to switch case-by-case.
4. For costs: log variable costs and COGS-related spend on the day the activity happened (the milk delivery on Tuesday is a Tuesday cost, regardless of when the invoice is paid). Let fixed costs run through the fixed-cost schedule with their start/end dates — nouz slices them daily automatically. Annual prepayments (insurance, accountant) should be entered as monthly fixed costs (annual ÷ 12) to avoid a one-month spike that distorts that month's comparison.
5. Read the daily number knowing which lens you picked. If you are cash-basis on revenue, your daily EBIT is "what the till and the bank did today, after the costs that hit today." If you are accrual-flavour on revenue, it is "what the work delivered today earned, against the costs that landed today." Either is useful; just know which one you are reading.

If you want to see your own daily P&L tonight without setting anything up — and decide for yourself which lens fits your shop — the profit margin calculator runs the EBIT math in your browser with no signup. For the full setup flow and same-day close-out, the nouz home page walks through the 8-minute setup. Plans on the pricing page are monthly only — no annual lock-in for a tool you can stop using next week.

And the conceptual companions, if you want to go deeper into the rest of the daily-P&L logic: EBIT explained (the operating profit formula that the cash-vs-accrual question feeds into), gross vs net revenue (the deduction layer between till and profit), COGS snapshot explained (why cost-at-sale survives product edits), cash flow vs profit explained (the close cousin of this article — why a profitable business can run out of money), daily vs monthly P&L (why the daily layer is where decisions happen), how to read a P&L statement (the line-by-line walk-through), and the daily P&L pillar guide (the cross-vertical synthesis). Together they cover the full operating accounting picture for a small shop without ever asking you to learn double-entry bookkeeping.

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