The main difference between cash basis and accrual accounting lies in the timing of when revenue and expenses are predictable. The cash method is a more direct acknowledgment of revenue and expenses, while the accrual method focuses on estimated revenue and expenses.
Difference Between Accrual And Cash Basis Accounting Systems
- In Accrual accounting, the recognized and recorded revenue and expenses are calculated, while in cash basis accounting the line objects aren’t documented until cash exchanges hands.
- Cash basis accounting is very easy method, but accrual accounting portrays a more accurate sketch by company’s health by including payable accounts and receivable accounts.
- The accrual method is the very commonly used method, especially by publicly-traded companies.
Accrual Accounting Method
The revenue is accounted for when it is earned. This method records revenue when a product is delivered to a customer with the probability that money will be paid in the future. The total operating cost of products and services are recorded although no cash being paid out yet for those expenses.
Cash Basis Accounting
When cash is received by hand then the Revenue is reported on the income statement only. When cash is paid out then Expenses are recorded. The cash method is mostly used in small businesses and for personal finances.
Accrual And Cash Basis Accounting
Advantage of the cash method
The key advantage of the cash method is its simplicity and clearness, it only save the financial records for cash paid or received. Tracking the cash flow of a corporation is also very easier with the cash method.
Disadvantage of the cash method
The disadvantage of the cash method is that it might exaggerate the health of a company that is large amount of cash but also has large sums of accounts payables that far exceed the cash on the books and the corporation’s current revenue flow. A shareholder might wind up the corporation is making a profit when, in reality, the corporation is losing money.
Advantage of the accrual method
The advantage of the accrual method is that it includes balance sheet receivables and payables and, as a result, is a more accurate and more predictable picture of the productivity of a corporation, particularly in the long term. The accrual method records all revenues when they are earned and all operating cost when they are incurred.
Accrual Accounting vs. Cash Basis Accounting Example
Let’s say you own a business company that sells machinery. If you sell $5,000 worth of machinery, under the cash method, that amount is not recorded in the books until the purchaser hands you the cash or seller receive the check.