Difference Between Cash and Accrual Accounting

Cash Accounting vs Accrual Accounting Comparison.

Cash Accounting vs. Accrual Accounting Infographics

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

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Cash Accounting vs Accrual Accounting (wallstreetmojo.com)

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 flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read morefrom 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 accountingCash AccountingCash Accounting is an accounting methodology that registers revenues when they are received & expenditures when they are paid in the given period, thereby aiming at cash inflows & outflows. read more.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 systemSingle Entry SystemThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company.read more. 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.

Video on Cash Accounting vs. Accrual Accounting

This has been a guide to cash accounting vs. accrual accounting. Here we discuss the top differences between cash and accrual accounting with infographics and a comparative table. You may also have a look at the following articles for further learning in accounting –

  • President and CEO – DifferencesAccounting Journal EntriesAccrual and ProvisionFinancial Accounting