Difference between Cash Vs. Accrual Accounting

Accrual accounting and cash accounting are two main methods of accounting. The underlying difference between Cash vs. Accural Accounting is the timing of which the income and expenses are recorded in the books of account.

In cash accounting method, the items are recorded when the actual cash transactions are made, irrespective of when the income is earned or expense incurred. Thus, if your company has delivered a product or a service to one of your clients and you operate with a 30-days credit period i.e., you will be get paid for your delivery after 30 days of your delivery. As per cash accounting, you will record the income from this delivery only once you receive the payment from your client, whether it’s before 30 days or after. On the other hand, in accrual accounting method, the items are recorded when you provide or receive a service or a product, even before the actual cash transactions are made. Accrual accounting method is a more commonly used method. So in the above case, you will record the income as soon as you have shipped the product or rendered the service.

It is the firm’s discretion to use the method which it deems suitable, as long as it is consistent in maintaining the accounts. Generally, small businesses opt for cash basis of accounting whereas larger firms go for accrual accounting.

Difference Between Cash Vs. Accrual Accounting


Cash Accounting

Accrual Accounting

Time Frame Revenue and expenses are recorded when the money is debited or credited. Revenue and expenses are recorded as soon as the service is rendered or used.
Accuracy This can be misleading because the time you receive money may be much later than the time you rendered the service. It has a very narrow view of business and there is no control on complex non-cash transactions. This is a more accurate form of representation and gives a real picture of the position of business.
Ease Of Use This is easier to maintain. Requires less journal entries as compared to Accrual accounting. It is difficult to maintain as transactions need to be recorded as they happen. This requires a lot more journal entries than cost accounting.
Cash Flow Cash accounting gives an accurate representation of cash going in and out of the system. Accrual accounting doesn’t give a correct representation of cash. As a result, managers have to maintain separate cash flow statements, which is an overhead.
Trend Analysis Since the transactions are recorded only when the cash changes hands, there may be a significant time gap between even occurrence and its recording. Hence, trend analysis may not be possible. Since transactions are recorded as they occur, there is an accurate representation of when the transaction has happened. Thus, it is easier to analyze the sales or expense patterns.
Industry Specific This method is not a preferred method of accounting for businesses which have a big gestation period and huge capital involved; e.g., construction, real estate. The method is followed generally by small businesses This is a preferred method of accounting for businesses which have a big gestation period and huge capital involved.
GAAP accepted Cash accounting method is not a GAAP approved method of accounting. This method is approved by GAAP (Generally Accepted Accounting Principles.
Taxation Since the transaction is recorded only when actual cash inflow or outflow is involved, tax liability may be lower at times. However, the method has its shortcomings and is not flexible for reporting for taxation purpose. Accrual accounting, for its accuracy, is apt for reporting for taxation purpose.

Which Method Should Be Used – Cash vs. Accrual Accounting

Each of the accounting methods has its own benefits and shortcomings. If you have a small business or a business type where cash is exchanged almost instantaneously, you can opt for cash accounting because of its ease of use.

On the other hand, if you have a huge business turnover where involving complex transactions like loans, repayments, inventory, creditors, reserves, accounts receivable etc. you are better off using the accrual basis of accounting. This method is considered to show a better picture of business profitability and its operations. 

Last updated on : January 18th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

  • Intangible Assets
    Intangible Assets and its Types
  • Advantages and Disadvantages of Fund Flow Statement
    Advantages and Disadvantages of Fund Flow Statement
  • Meaning and Types of Liabilities
    Meaning and Types of Liabilities
  • What is Debit and Credit – An Easy to Understand Explanation
    What is Debit and Credit – An …
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    how to calculate marginal cost formuladifference between hypothecation and pledgemaximisation definitionbest inventory turnover ratiofuture value present value formuladebtor turnovercapm cost of capitalprepaid insurance current assetmeaning of demeritsprofitable indexdefine debit in accountinginstalment credit agreementhow to find the profitability indexamerican depository receipts and global depository receiptsformula of ytmprofit maximization pptwhat is the basic accounting equation explain with exampleacid test ratio formulahow to calculate the internal rate of returncalculation of debtor daysdefinition of irrelevancefixed selling and administrative expensesdefine joint venturesdebentures bondsindirect costingdividend growth methodsemi variable costs definitionreceivable turnover formulacalculating wiplessee vs lessorinternal rate of return definition and examplehorizontal integration advantages and disadvantagesdebt equity ratio significancedebits definitionasset debentureowner equity equationadvantages and disadvantages of bank overdrafthorizontal mergers definitionhow to find receivables turnover ratiodouble entry bookkeeping system definitionadvantages and disadvantages of commercial bankswhat is fund flow and cash flowconstant growth stock calculatorhow do you calculate profit margin ratiodefine documentary credithow to calculate bep in unitsmeaning of fund flowwhat does pbp meanwhat does sundries mean in accountingdifference between financial accounting and cost accounting pptmaximization of shareholder wealthhow to calculate debtorsdebtors days outstandingdscr rationaccounts receivable turnover in daysdouble entry system advantages and disadvantageswhat are preferred stocks advantages and disadvantagesunsecured bank loan definitionadvantages of dividend growth modeldebt meaning in hinditypes of variances in standard costingdividend payout ratio examplewru debenturesconvertible debenture agreementgaap accounting rules for capitalizing costsdisadvantages of horizontal integrationadvantages of convertible bondsrevenue maximisationzero based budgeting conceptdcr ratioassumptions of capital structure theoriescost accountant definitionwhy international marketing differs from domestic marketing