Cash and accrual accounting are two different methods that companies can use to record and report their financial transactions. While both methods provide useful information about a company’s financial performance, there are some key differences between them.
The differences between cash and accrual
The main difference between cash and accrual accounting is the timing of when transactions are recorded. In cash accounting, transactions are recorded when the cash is actually received or paid out. For example, if a company sells a product, the sale would be recorded when the customer pays for the product. On the other hand, in accrual accounting, transactions are recorded when they are earned or incurred, regardless of when the cash is received or paid out. For example, if a company sells a product, the sale would be recorded when the product is shipped to the customer, even if the customer has not yet paid for the product.
Another key difference between these methods is the way in which they present a company’s financial performance. In cash accounting, the focus is on the actual cash inflows and outflows of the company. As a result, this method can provide a more realistic picture of the company’s current financial situation. On the other hand, accrual accounting is more focused on the underlying economic activity of the company. This means that it can provide a more complete picture of the company’s financial performance over time, including the recognition of revenue and expenses.
One advantage of cash accounting is that it is simpler and easier to understand than accrual accounting because it only involves recording transactions when cash is actually received or paid out.
Accrual accounting is based on the principle that both revenue and cost are recognised when they are incurred or used. This can differ from when the cash is paid and so can be complicated to keep track of. ScaleXP helps by automating accrued income recognition.
Cash vs accrual example
As a simple example, a university collects money every term, usually three times per year. However, classes are taught over a 10 month period (September to June). Using cash accounting, the university would record revenue whenever they are paid. Using accrual accounting, the university would recognise revenue equally over the term – it would be classed as accrued revenue until the payment is made at the end of the term.
Should you use accrual accounting?
All publicly listed companies, as well as those above an audit threshold, are required to follow the principles of accrual accounting. Cash accounting tends to be used by smaller businesses.
Overall, cash and accrual accounting are two different methods that companies can use to record and report their financial transactions. While both methods have their advantages and disadvantages, the choice of which method to use will depend on the needs and circumstances of the company, with most companies evolving to accrual accounting as they grow.