Cash Basis vs Accrual Accounting - What's the Difference? (Which Method Is Better?)

Cash Basis vs Accrual Accounting - What's the Difference? (Which Method Is Better?). In this video I will discuss about Cash Basis Accounting vs Accrual Accounting.

So, the Main Difference between them is Timing.
Cash-basis accounting only recognizes income when money changes hands. They will also recognize an expense once the company has released funds to the payee. Accrual basis of accounting will record a transaction when it occurs. That applies even when no money has changed hands. It also monitors expenses paid and revenues earned before service delivery. Hence, cash-basis accounting records transactions when money moves, while accrual accounting recognizes transactions when they arise.

Complexity
Managing money using cash-basis accounting is straightforward. All the accountant has to do is monitor cash as it comes in and leaves an entity’s accounts. They focus more on the cash flow than the invoices. Accrual accounting is complex. First, the accountant records revenues and expenses as they occur, not when cash is received or released. That means they record payables and receivables. What makes this complex is tracking an invoice from its generation to its payment.

Accuracy
Cash-basis accounting achieves little accuracy levels. That is because the accountant only records cash as it enters and leaves the business’ accounts. Hence, one might think their business is making profits when it is not. On the other hand, accrual accounting is an accurate method of tracking a business’ finances. The reason for this is that it goes beyond cash movements. It monitors unpaid invoices and income that a company has not received.

But do they have any similarities?
Yes. Both involve recording the revenues a company earns and the expenses it incurs over time. They each help monitor a company’s financial performance and require transaction records for their effectiveness.

To sum up, how do they compare – Cash-basis and Accrual-basis Accounting?
Both the cash and accrual accounting bases are equally good. My best option depends on the size of my business. If my company is small, I would benefit from having a simple and familiar method of accounting. The method should be easy to understand and inexpensive. My best fit would be cash-basis accounting because it meets these criteria. If I have a large business with many transactions and am required to present audited financial statements, I would need to use accrual accounting. Audited financial statements must comply with GAAP.
GAAP does not accept cash-basis accounting. To ensure my business stays compliant, I would need to adopt accrual accounting.

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