Cash Basis Accounting VS Accrual Basis Accounting

Cash Basis Accounting VS Accrual Basis Accounting

The Question of Cash Basis Accounting VS Accrual Basis Accounting comes up when you are first starting your business. This article will attempt to outline some of the differences between Cash Basis Accounting VS Accrual Basis Accounting. Make sure to consult an accountant before you make you final accounting decisions.

Cash Basis Accounting VS Accrual Basis Accounting

Cash Basis Accounting

Cash basis accounting or cash accounting deals with the recording of transactions when actual cash inflows and outflows occur in business.

Cash accounting is helpful in a small business where you only concern about cash in hand and balance in a bank account. For example, a retail store which deals with daily sales and purchases of different commodities and daily wages of temporary staff or monthly salaries of permanent staff that records only cash transactions when cash flows in or out. Cash accounting provides actual income and expenses occurred in a given period.

Advantages

Cash accounting method is quite simple for you if you deal with cash transactions. It suits you if you have a small business like a retail store.

Cash basis accounting method provides an accurate basis for short-term decisions because you are well aware of your financial position.

You know the money you have in hand and your bank accounts and can easily meet your demands.

Disadvantage

Cash basis accounting may not be beneficial for long term. In one month you may have huge profit but in the second month, the situation is quite opposite. It might be possible some creditors have paid in the first month, but the actual sales are low.

It is ambiguous about the money that is owed to you, or you owe to others that mean it doesn’t clarify some payables and receivables.

Accrual Basis Accounting

Accrual basis accounting or accrual accounting deals with the recording of the transactions when income and expenses occur.

If an organization makes sales on credit at any specified terms, a transaction would be recorded to count the sales and also the amount which is receivable from the party. The Same case is with the expense. Accrual accounting method is normally used in the public sector.

Advantages

Accrual accounting is complicated as compared to the cash accounting but feasible for those who don’t get paid immediately (service provider).

Accrual basis accounting method gives clear picture your income, payables, and receivables. It provides the accurate basis for long-term financial planning for your business.

Disadvantages

It is a dark aspect of accrual accounting that it doesn’t provide the actual position of cash. You have massive sales in your books of accounts, but you don’t have cash in your bank accounts or any other reserve. It may create a serious cash problem.

The significant difference between two methods is only the time. Both approaches can be understood from the following example.

Consider the case when you start a job in January, finish it in March and then get paid on June 30. By using the cash method, you would record the income on 30th of June. But while using accrual basis accounting, you would record the revenue in January.

The same case is with the other transactions like purchases and other expenses.

Now the issue is which method should be adopted. As mentioned earlier that the business which is directly related to cash transitions like retail stores of grocery, furniture, decoration pieces and many other like this, usually use cash accounting method but many researchers suggest that size of business and complexity of transaction plays an important role in the adoption of mentioned methods. Some of the researchers also suggest that if the annual sales of your business are more than $5 million, you must use accrual basis accounting.

Accrual accounting is more complicated than cash accounting, so there is a need of in-depth knowledge of whole accounting system. You must have resources available to manage the accrual accounting. You will have to hire a team of professionals to manage the record.

Cash Basis Accounting VS Accrual Basis Accounting 


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