Differences Between Cash Accounting and Accrual Accounting
There are two kinds of accounting – cash accounting and accrual accounting.
- In cash accounting, the business will only record the transaction when cash inflow or cash outflow occurs.
- In accrual accounting, on the other hand, income and expenses are recorded whenever they occur.
So, you can see that there is huge difference between cash accounting and accrual accounting.
As an example, we can say that cash flow analysis is done by following cash accounting and income statement is created by following accrual accounting. But according to the companies act, only accrual accounting is recognized.
In this article, we will look at each accounting in detail and then we will go through a comparative analysis between them.
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Without any ado, let’s get started.
Cash Accounting vs Accrual Accounting Infographics
There are many cash accounting and accrual accounting differences. Let’s have a look one by one –
Difference between Cash Accounting 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 between cash accounting and accrual accounting basis–
- 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 flow 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 large business; then it’s wiser to go with 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 in the beginning of any business, business owners prefer to go with cash accounting.
- Tax advantage: If you own a micro business, it’s better to go for cash accounting method; because by using 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: In accrual basis of accounting, 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 cash accounting method, the transaction is recorded when the cash is received or expended. In this case, 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 single entry system. Accrual accounting follows 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.
Cash Accounting and Accrual Accounting Comparison Table
|Basis for Comparison of Cash Accounting vs Accrual Accounting||Cash Accounting||Accrual Accounting|
|1. Meaning||In cash accounting, incomes and expenses are only recognized through cash.||In accrual accounting, incomes and expenses are recognized when they are done (on mercantile basis).|
|2. Includes||Only cash expenses, cash incomes.||All expenses and all incomes.|
|3. Nature||Simple and easy to understand.||Complex and difficult to understand.|
|4. Recognized by||Not recognized by Companies Act.||Recognized by Companies Act.|
|5. How the accounting is done?||When cash is received or paid.||When revenue is earned or loss is incurred.|
|7. 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.|
|8. Holistic in approach||No, because it only talks about cash.||Yes, because it includes all of the transactions.|
|9. Which one is more accurate?||Accuracy of cash accounting is doubtful since it doesn’t take every transaction into accounting.||It is more accurate method of accounting.|
Cash accounting and accrual accounting both are important in their respective areas.
A sole-proprietorship company which has just been starting its business should follow cash accounting since it’s easy to maintain and there are only a few financial transactions in the beginning. On the other hand, in the case of a large-cap company, accrual accounting is best because cash accounting wouldn’t be able to handle hundreds and thousands financial transactions per day.
That means you need to understand for which company what accounting is applicable. Sure accrual accounting is always a more evolved method of accounting, but without the employee support, it’s almost impossible to maintain.
Video on Cash Accounting vs Accrual Accounting
This guide highlights differences between cash accounting vs accrual accounting with infographics and comparison table. You may also have a look at these articles below for further learnings in accounting –
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