What is Cash Accounting?
Cash accounting is a method of payment where beneficiaries are recorded in the period in which they are received, and expenses that are paid are also recorded in this period. In other words, you can say that revenues and expenses are recorded when cash is received or paid.
Cash accounting is also known as cash accounting. This is the simplest method because all accounting is simply cash-driven. The company records revenue when it receives payments from customers. This method does not recognize receivables or payables.
Many small businesses also use cash accounting because it is easy to maintain. It is easy to determine when a transaction occurs and there is no need to track receivables. This method also helps track how much cash a company actually has at a given point in time. You can view your account balance and know exactly what resources are available.
Since, the transaction is not recorded until the money is received or paid, the company’s income is not taxed until it is deposited.
An example of cash accounting
If a company sells $20,000 worth of inventory to customers, you will not record the transaction until you receive the money or receive a check.
Benefit of cash accounting
Cash accounting is beneficial because it is simpler and cheaper than accrual accounting. For some small business owners who keep no inventory, this is good accounting practice. Many small businesses avoid accountants and complex accounting systems.
What is Accrual Accounting?
Accrual accounting is a method of accounting where revenues and expenses are recorded as they are earned, regardless of when the money is actually received or paid.
The accrual-basis accounting gives more realistic ideas about income and expense during the period of time. Providing long-term pictures of any business that a cash-basis accounting can’t provide.
The accrual accounting does not recognize cash flows. Businesses that actually have empty bank accounts can appear to be very profitable. Accrual accounting without careful monitoring of cash flow can have devastating consequences.
The main reason for using accrual accounting is If a company uses accrual accounting systems, then as an inverter, you do not have to worry about their day-to-day affairs.
An example of accrual accounting
A simple example of accrual accounting is where a company makes a sale to a customer and the buyer pays the seller within a specified period of time after the transaction. In this case, income is earned before cash is received.
Benefit of accrual accounting
Accrual accounting clarifies between generated revenues and costs. It offers a more accurate picture of the company’s assets on its balance sheet. It also helps in planning the growth of the company.
Difference Between Cash Accounting and Accrual Accounting
The difference between cash and accrual accounting is the timing of when revenues and expenses are recorded. The cash method provides immediate recognition of revenues and expenses, while the accrual method focuses on expected revenues and expenses.
Accrual accounting records revenues and expenses when transactions occur but before money is received or issued. Cash basis accounting records revenues and expenses when the cash related to these transactions is actually received or issued.
Comparison Between Cash Accounting and Accrual Accounting
| Cash Accounting | Accrual Accounting |
| It records income and expenses when actual payments are received. | It records income and expenses as these transactions occur and before any money is received. |
| Recognize expenses when money is spent. | Recognize expenses when billed, eg when you receive an invoice. |
| Taxes not paid on money not yet receive | Taxes are paid on money you still owe. |
| Mostly used by small businesses and sole proprietors with no inventory. | Required for revenue businesses over US$25 million. |