What Is The Difference Between Cash Accounting And Accrual Method?
As per Basic Principles of Accounting, there are two methods recognize income/revenue or expenses, i.e. on CASH basis or on ACCRUAL basis.
In ACCRUAL basis, income/revenue is recognized at the time of occurrence of sale transaction, irrespective of the fact of payment being received at the same time or some time later. For eg., A follows accrual basis of accounting in his business. He sells goods to B on 15/10/2014 but receives payment on 20/10/2014. Now, since he is following accrual method, he will record his sale transaction on 15th Oct. (i.e. as and when the transaction occurred), instead of 20th Oct. (i.e. as and when the payment is received.)
In CASH basis, income/revenue is recognized at the time of receipt of payment, irrespective of the time of occurrence of the sale transaction. Following the above example, if A follows cash basis of accounting then he will record the sale on 20th Oct, instead of 15th Oct. (at the time when he receives money for the goods sold).
The same concept can be followed for expenses too. There are times when we pay for expenses at a later date (usually in case of recurring or regular expenses directly associated with our business). In Cash basis, we record the expenses at the time when we pay for them, and in accrual basis we record expenses as and when they occur.
Cash method does a remarkable job in tracking cash flow because it records inflows and outflows as and when they occur. This feature is not found in accrual method of accounting.
Cash method is suitable for small scale enterprises.
The both are method of recognizing revenue and expenditure. How and When you add or pass entry for income and expenditure. In accrual accounting we enter the transaction as income or expenses if it is not paid or received . For example salary payable on 31.3 2014 we will be treated as expense on that data and expenditure will be booked.
In cash accounting method the expenses and revenue is recognized only when the payment is made. The cash method is most used by small businesses and for personal finance
The main difference between these two forms of accounting goes right back to timing. Of course, timing has a partner here. It is called revenue recognition. Cash basis only records revenue when cash is received, and not a moment before. It also only recognizes an expense when cash has been paid out. So, even if a bill is sitting on your desk, if it has not been paid, it is not considered an expense in cash basis accounting – at least not until you write a check to pay that bill.
In the accrual basis, revenue is recognized when it is earned and not when it is received. Expenses are recognized when bills are received regardless of when they’re paid.
Another pretty important difference in these two forms of accounting is how well cash is tracked. Cash-basis accounting does an excellent job of tracking cash flow because it records the inflows and outflows only when they occur.