Difference Between Accrual and Cash Basis Accounting Systems
What is accrual accounting system?
It is an Accounting method that records the income and expenses data of the company when they are acquired, anyway of when cash is exchanged. The phrase “accrual” refers to any individual entry recording income or cost in the absence of a cash transaction.
With this method, income and operating cost are recorded as they arise, regardless of whether or not money has really changed hands. A very important example is a sale on credit. The sale is entered into the books sheet when the statement is generated quite than when the money is collected.
Similarly, expenditure occurs when materials are ordered or when a workday has been logged in by a worker, not when the check is really written.
What is Cash Basis Accounting system?
When cash is received by hand then the income is reported on the revenue statement only. When money is paid out then operating cost is recorded. The cash method is mostly used in small corporations and for personal finances.
Cash Basis vs Accrual Accounting
The major differentiation between cash basis and accrual accounting lies in the timing of when income and operating cost are predictable. The cash method is a more direct recognition of income and operating cost, while the accrual method focuses on estimated income and operating cost.
- In the Accrual accounting, the predictable and recorded income and operating cost are calculated, while in cash basis accounting the line objects aren’t predictable until money exchanges hands.
- Cash basis accounting is extremely easy method, but accrual accounting depicts a more precise sketch by company’s health by including payable financial statement and receivable accounts.
- The accrual method is mostly used method, especially by publicly-traded firms.
Key Differences Difference Between Accrual and Cash Basis Accounting Systems
Advantage of the cash method
The main key advantage of this method is its simplicity and clarity, it only save the financial records data for money paid or received. Tracking the money flow of a company is also very easier with the cash method.
Disadvantage of the cash method
The major disadvantage of this method is that it may amplify the performance of a corporation that is very large amount of money but also has large arithmetic of accounts payables that far exceed the cash on the books and the company’s current revenue flow. An investor might wind up the company is making a profit when, in reality, the company is losing money.
Advantage of the accrual method
The main advantage of the accrual method is that it contain balance sheet receivables and payables and, as a result, is a very precise and more predictable image of the output of a company, mostly in the long term. The accrual method records all revenues data when they are earned totally and all working cost when they are acquire.