Difference Between Cash & Accrual Accounting Method

Small business owners are often confused about the difference between judi online cash and accrual basis accounting. This might sound like something that an accountant should show but this information is useful for business owner as well. In this article, we’ve explained how each of these accounting methods work. Find out more which accounting method is best for your business.                 

Introduction to Cash method

Cash method is an accounting system that identifies income (or revenue) only when payment is accepted and expenses only when payment is done. The cash method is straight forward in sense that the business’s books are maintained on the basis of the real flow of cash in and out of the business. In this case, income is logged as soon as it is received, and expenses are reported when they are truly paid.

The cash method is implemented by several sole proprietors and trades with no inventory. The cash basis is generally practised by small companies and users because it is comparatively easier and less costly. Cash basis accounting does not follow with the rules of generally accepted accounting principles (GAAP) and it often leaves a time gap between recording the source of an action (purchase or sale) and its result (disbursement or receipt of money).

If in certain situation, a client pays you in advance, cash accounting method permits you to account for those funds on your income statement when they are accepted instead of waiting till you truly earn them. Cash method also offers a lot of inventive freedom to handle what you own in the bank to suit your own style of accounting and context at any time. This makes the accounting process easier for tracking internally.

Introduction to Accrual method

The accrual method of accounting is the theory of recording revenues when received and expenses as gained. Accrual method of accounting is the normal approach to recording and maintaining transactions for businesses.  This method logs revenues on the income statement when they are received even if the client will pay after period of 30 days. In the situation when the revenues are earned the business will credit a revenue account and will also debit the asset account Accounts Receivable. In this case, when the customer pays after 30 days passed when the revenues were earned, the company will debit cash and will also credit Accounts Receivable.

The accrual method of accounting is supported under both generally accepted accounting principles (known as GAAP) as well as international financial reporting standards (known as IFRS). These accounting frameworks offer sufficient guidance on how to account for revenue and expense transactions in the devoid of the cash receipts or expenses that would activate the recordation of a business under the cash base of accounting.

In terms of accounting, the accrual method and the related adjusting entries will outcome in a complete and precise reporting of a company’s properties, equity, liabilities, and remunerations during all accounting process.