Cash vs. Accrual: What's the Difference in These Accounting Types?
Whether it's a checkbox on your tax forms or mentioned in an accounting document, cash and accrual accounting types are two of the most common methods of accounting used in the modern world. But what are the differences between these two accounting types? Would cash accounting or accrual accounting work better for your company? Here's a quick look at both accounting types and their benefits and drawbacks.
All accounting systems record the income and expenses of a business. The biggest difference between these two accounting types is when these transactions are recorded. One records these transactions when cash moves while the other type records these same transactions when they occur. This can make a big difference in the company's financial picture, with one impacting the overall view of cash flow while the other impacts the accuracy of income statements.
Cash accounting records revenues on the income statement period when a company receives income from the customer. Similarly, it records expenses on the income
statement period in when they are paid. This is a much simpler form of accounting in terms of determining when to record transactions, and is the most common accounting type used by small businesses. It can provide a better picture of a company's cash flow situation by avoiding false reporting of income that may never come into actuality from non-paying customers.
In accrual accounting, the income and expenses are recorded when they are earned or made, rather than when they are paid. This type of accounting is often used by companies that want a better picture of their profits during a particular period. It shows the profits as they are earned and the expenses that are made to earn those revenues. It provides a more accurate picture of the company's financial situation at specific points in time. By knowing the difference between cash and accrual accounting systems, you can choose the best type for your company. If you're not sure which type would work best or are concerned that you're not currently using the right system for your company, we can help. At AccountRely, our accounting professionals are ready to take an active interest in your business. Contact us today to get started.