Difference Between Cash and Accrual Accounting
In cash accounting, the business will record transactions only when there is a cash inflow or a cash outflow. However, in accrual accounting, revenue is recognized when a sale is completed (cash or credit sale), and costs are matched and recognized concurrently with the associated revenue (regardless of when the expense is paid).
Cash Accounting vs Accrual Accounting Comparison.
|Basis for Comparison||Cash Accounting||Accrual Accounting|
|Meaning||In cash accounting, incomes and expenses are only recognized through cash.||In accrual accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. , incomes and expenses are recognized when they are done (on the mercantile basis).|
|Includes||Only cash expenses, cash incomes.||All expenses and all incomes;|
|Nature||Simple and easy to understand.||Complex and difficult to understand.|
|How is accounting done?||When cash is received or paid;||When revenue is earned, or loss is incurred.|
|Why useful?||We can quickly get how much cash the business generated (i.e., net cash flow).||We can understand how much profit or loss a business has made during a particular period.|
|Holistic in approach||No, because it only talks about cash.||Yes, because it includes all of the transactions.|
|Which one is more accurate?||Accuracy of cash accounting is doubtful since it doesn’t take every transaction into accounting.||It is a more accurate method of accounting.|
Cash Accounting vs. Accrual Accounting Infographics
Let’s see the top differences between Cash vs. Accrual Accounting.
You may ask why most businesses don’t use cash accounting and only use accrual accounting. Very recently, Biocepts transitioned from Cash Accounting to accrual accounting as they believed it is a more timely reflection of revenues associated with test volumes as well as revenues and expenses.
Let us now look at some important differences –
- Size of business: It matters a lot what size of business you own. If you own a business that is micro-sized and you earn a small amount of cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. from it (that means you happen to deal with the minimum amount of transactions), then cash accounting is the best method to use. But if you have a small, medium, or a large business, then it’s wiser to go with an accrual accounting basis.
- Simplicity: Accrual basis of accounting has the capacity to deal with complex types of transactions. But cash accounting only handles simple transactions. That’s why at the beginning of any business, business owners prefer to go with cash accountingCash AccountingCash Accounting is an accounting methodology that registers revenues when they are received & expenditures when they are paid in the given period, thereby aiming at cash inflows & outflows. .
- Tax advantage: If you own a micro-business, it’s better to go for the cash accounting method; because by using the cash accounting method, you would be able to get the tax advantage. But for a larger business, tax advantage can only be tapped by using the accrual method of accounting.
- Time of transaction: On the accrual basis of accounting, the time of the transaction is very important. As per the accrual method of accounting, the accountant records the transaction when it occurs (not when the money would be received). But the cash accounting method is the complete opposite. In the cash accounting method, the transaction is recorded when the cash is received or expended. In this case, the accrual basis of accounting has a demerit. The disadvantage is the firm needs to pay taxes even when the company is yet to receive the revenue (a great example of this is sales on credit).
- Double-entry Systems – Cash accounting follows a single entry system. Accrual accounting follows a double-entry system.
- Accuracy – Cash accounting isn’t very accurate as the focus is only on cash. Accrual accounting is comparatively more accurate.
- Holistic – Cash accounting isn’t a holistic method of accounting. But accrual accounting is a holistic method of accounting.
Video on Cash Accounting vs. Accrual Accounting
This has been a guide to cash accounting vs. accrual accounting. Here we discuss the top differences between cash accounting and accrual accounting with infographics and comparative table. You may also have a look at the following articles for further learnings in accounting –