Cash vs Accrual basis is an important concept to understand when it comes to accounting. It is the difference between recording transactions when money is received or when services are provided. The cash basis of accounting records income and expenses when money is actually received or paid out, while the accrual basis of accounting records income and expenses when they are earned or incurred. Each method has its own advantages and disadvantages, and it is important to understand which one is best for your business. This article will provide an overview of the differences between cash and accrual basis accounting, as well as the pros and cons of each.
What is the Difference Between Cash and Accrual Basis Accounting?
The primary difference between cash and accrual basis accounting is the timing of when revenue and expenses are recognized. Under the cash basis, revenue is recognized when cash is received and expenses are recognized when cash is paid out. Under the accrual basis, revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is exchanged.
The cash basis of accounting is simpler and easier to use than the accrual basis. It is often used by small businesses that do not have a large volume of transactions. The accrual basis is more complex and requires more record keeping, but it provides a more accurate picture of a company’s financial position.
Both methods of accounting are acceptable under Generally Accepted Accounting Principles (GAAP). However, the accrual basis is required for companies that are publicly traded or that must file reports with the Securities and Exchange Commission (SEC).