The difference between Cash Basis and Accrual Basis? How do the most well-known accounting basis benefit businesses?

Many business owners wonder what the difference is between the most well-known accounting basis. 

Let’s discuss some differences and how they can be applied to your business with EdooSmart via this blog!

1. What is the difference between Cash Basis and Accrual basis?

Here are some key differences between cash basis accounting and accrual basis accounting: 

Cash Basis Accounting Accrual Basis Accounting
Revenue RecognitionWhen revenue is received When revenue is earned 
Expense RecognitionWhen expenses get paidWhen expenses get billed
Credit AccountNo accounts receivable or account payableIncludes receivables and payables
TaxationNot paid for cash that hasn’t been receivedPaid on money is still owed
AccuracyCan exceed the financial wealth of a businessProvides accurate representation of the profitability
Easiness in useSimple and straightforward, but isn’t as popularA bit complex but more widely used
Used bySmall service-based businesses, non-profit organizations,Public companies. Corporations and businesses filing audited financial statements
Source: Deskera blog

2. Cash basis and accrual basis benefits 

The main advantage of the cash basis is its simplicity. The accrual approach can become pretty challenging when you have more involved transactions than we’ve seen thus far. You can find yourself moving money between multiple different accounts and trying to figure out when it’s appropriate to record each transaction on the income statement if you have some invoices paid in advance, some in arrears, and others in installments.

Another benefit of the cash basis is that it gives an accurate picture of how much cash you have on hand at any particular time. As you may know, managing your cash flow is essential for small businesses. Cash accounting may help ensure you always have enough to stay afloat.

On the other hand, an accrual basis provides a more accurate representation of your total “score” at any given time. Even if you haven’t yet gotten the money, budgeting is simpler because all your earnings and expenses have been considered. The accrual approach is more effective for managing complex transactions because you can keep track of the money in various accounts based on whether it is paid in advance or is anticipated but not yet received.

According to accrual accounting, transactions must be documented whenever they are earned, not only when a client commits to pay later. Cash basis accounting requires that all transactions be recorded when cash or cheques have been received.

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