16.5 Cash Versus Accrual Accounting GV

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Cash Versus Accrual Accounting
When creating accounting systems for a business, one of the
decisions that needs to be made first is whether to use cash
or accrual basis accounting.

The difference between the two methods is the timing of when
transactions are recorded in accounting.

With cash basis accounting, revenue is recorded when cash
is received from customers, and expenses are recorded when
cash is paid out.

With accrual basis accounting, revenue is recorded when the
sale is made, whether or not the cash money is received from
customers. Expenses are recorded when they are incurred,
whether or not the cash money has been paid out.

Cash basis accounting is simpler but may not give an
accurate picture of the company’s current financial condition.
This is because revenue may be earned on a particular date,
but this will not be reflected in the accounting until the cash is
received. Similarly, a company may owe a debt that may not
appear in the accounting until it is paid.

Accrual basis accounting is the standard practice for most
businesses, except for some very small businesses.