Cash Accounting vs Accrual Accounting

Publication Date :

21 Jan, 2018

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Table Of Contents

Difference Between Cash and Accrual Accounting

In cash accounting, the business will record transactions only when a cash inflow or a cash outflow. However, revenue is recognized in accrual accounting when a sale is completed (cash or credit sale). As a result, costs are matched and recognized concurrently with the associated revenue (regardless of when the expense is paid).

Difference Between Cash and Accrual Accounting

Cash Accounting vs Accrual Accounting Comparison.

Basis for Comparison	Cash Accounting	Accrual Accounting
Meaning	In cash accounting, incomes and expenses are only recognized through cash.	In accrual accounting, incomes and expenses are recognized when they are done (on the mercantile basis).
Includes	Only cash expenses, cash incomes.	All expenses and all incomes;
Nature	Simple and easy to understand.	Complex and difficult to understand.
How is accounting done?	When cash is received or paid;	When revenue is earned, or loss is incurred.
Focus	Liquidity.	Revenue/Expense/Profit/Loss.
Why useful?	We can quickly get how much cash the business generated (i.e., net cash flow).	We can understand how much profit or loss a business has made during a particular period.
Holistic in approach	No, because it only talks about cash.	Yes, because it includes all of the transactions.
Which one is more accurate?	Accuracy of cash accounting is doubtful since it doesn’t take every transaction into accounting.	It is a more accurate method of accounting.

Video on Cash Accounting vs. Accrual Accounting

Cash Accounting vs. Accrual Accounting Infographics

Let's see the top differences between Cash vs. Accrual Accounting.

Key Differences

You may ask why most businesses don’t use cash accounting and only use accrual accounting. Very recently, Biocepts transitioned from Cash Accounting to accrual accounting as they believed it is a more timely reflection of revenues associated with test volumes and revenues and expenses.

source: prnewswire.com

Let us now look at some important differences -

Size of business: It matters a lot what size of business you own. If you own a micro-sized business and earn a small amount of cash flowfrom it (that means you happen to deal with the minimum amount of transactions), then cash accounting is the best method to use. But if you have a small, medium, or large business, it’s wiser to go with an accrual accounting basis.
Simplicity: Accrual basis of accounting can deal with complex types of transactions. But cash accounting only handles simple transactions. At the beginning of any business, business owners prefer to go with cash accounting.
Tax advantage: If you own a micro-business, it’s better to go for the cash accounting method; because by using the cash accounting method, you would be able to get the tax advantage. But for a larger business, tax advantage can only be tapped by using the accrual method of accounting.
Time of transaction: On the accrual basis of accounting, the time of the transaction is very important. As per the accrual method of accounting, the accountant records the transaction when it occurs (not when the money would be received). But the cash accounting method is the complete opposite. The cash accounting method records the transaction when the cash is received or expended. In this case, the accrual basis of accounting has a demerit. The disadvantage is the firm needs to pay taxes even when the company is yet to receive the revenue (a great example of this is sales on credit).
Double-entry Systems - Cash accounting follows a single entry system. Accrual accounting follows a double-entry system.
Accuracy - Cash accounting isn’t very accurate as the focus is only on cash. Accrual accounting is comparatively more accurate.
Holistic - Cash accounting isn’t a holistic method of accounting. But accrual accounting is a holistic method of accounting.