Cash vs. Accrual Based Accounting

Difference between Cash and Accrual Based Accounting

The underlying difference between cash and accrual based accounting essentially lies on the timings when sales and purchases are subsequently recorded in the accounts. Cash accounting primarily recognizes revenue and expenses when material transaction in the form of cash, takes place. This means transactions are only recorded when money changes hands. On the other hand, as far as Accrual Basis of Accounting is concerned, it can be seen that it recognizes revenue when it’s earned. Subsequently, expenses are also recognized when they are billed. Both these accounting methods are further explained below:

Cash Based Accounting

As far as Cash based Accounting is concerned, it can be seen that it recognizes transactions when cash is received, and expenses are recorded when they are paid. Therefore, in this particular method, accounts receivable and accounts payable are not even accounted for.

The main rationale behind businesses using this particular mechanism is the fact that cash basis of accounting is relatively easier to maintain. In this case, it is also easier to determine when a transaction has occurred. Furthermore, there is no subsequent need to track receivables or payables. Therefore, it is easier to manage and maintain.

Additionally, because of the fact that cash method is beneficial in terms of tracking the actual position of cash the business has at any given point in time. This can simply be done by checking the available bank balances to get a holistic idea about the existing position of the business.

Accrual Based Accounting

Accrual Based Accounting requires revenues and expenses to be recorded right when they are earned. As a matter of fact it does not consider the timing of when cash is actually received. The greatest advantage of using accrual based accounting method is the fact that it provides a true and fair view of the business representation, which can otherwise not be achieved. On the contrary, it can also be seen that accrual based accounting deters companies from having an idea about their actual cash flow position, because of which the business does not have a fair idea about the exact standing of their financial resources and the existing liquidity position.

Conclusion

Therefore, to further elaborate the point that has been made earlier, it can be seen that cash and accrual basis of accounting mainly differ on grounds of recording transactions contingent on the actual cash received versus the actual transaction that has taken place in this regard. Therefore, the underlying difference can be seen to be an important factor in determining the positioning of the business in terms of liquidity position in case of Cash Based Accounting, and profitability in case of Accrual Based Accounting. However, the overall efficacy of either of these methods can be defined varying from business to business, depending from situation to situation. In most cases, from a business perspective it is really helpful to realize the fact that a mixture of both these methods need to be utilized in order for the business to get a better idea regarding their profitability, as well as their liquidity position.