How does accrual accounting differ from cash basis accounting?

By Chizoba Morah AAA
A:

The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is received and for expenses only when the money is paid out. On the other hand, the accrual method accounts for revenue when it is earned and expenses goods and services when they are incurred. The revenue is recorded even if cash has not been recieved or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses.

For example: Let's say you own a business that sells machinery. If you sell $5,000 worth of machinery, under the cash method, that amount is not recorded in the books until the customer hands you the money or you receive the check. Under the accrual method, the $5000 is recorded as revenue immediately when the sale is made, even if you receive the money a few days or weeks later. The same thing occurs for expenses. If you get an electric bill for $1700, under the cash method, the amount is not added to the books until you actually pay the bill. However, under the accrual method, the $1700 is recorded as an expense the day you get the bill.

Learn more about Financial Statements in our article, What You Need To Know About Financial Statements.

RELATED FAQS

  1. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ...
  2. What's the difference between book and market value?

    Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other ...
  3. What is an asset?

    An asset is anything of value that can be converted into cash. Assets are owned by individuals, businesses and governments. ...
  4. What's the difference between weighted average accounting and FIFO/LILO accounting ...

    The main difference between weighted average cost accounting, LIFO, and FIFO methods of accounting is the difference in which ...
RELATED TERMS
  1. Expanded Accounting Equation

    The expanded accounting equation is derived from the accounting ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Billing Cycle

    The interval of time during which bills are prepared for goods ...
  4. Amortization

    1. The paying off of debt in regular installments over a period ...
  5. Price-To-Cash-Flow Ratio

    The ratio of a stock’s price to its cash flow per share. The ...
  6. Contra Liability Account

    A liability account that is debited in order to offset a credit ...
comments powered by Disqus
Related Articles
  1. Material Adverse Effect A Warning Sign ...
    Markets

    Material Adverse Effect A Warning Sign ...

  2. Footnotes: Early Warning Signs For Investors
    Retirement

    Footnotes: Early Warning Signs For Investors

  3. An Introduction To Depreciation
    Active Trading

    An Introduction To Depreciation

  4. 10 Sources Of Nontaxable Income
    Taxes

    10 Sources Of Nontaxable Income

  5. How To Calculate A Z-Score
    Markets

    How To Calculate A Z-Score

Trading Center