What Is the Difference Between Cash and Accrual Accounting?

As a business owner, you may be wondering which type of accounting system is best for your company. There are two types of systems: cash basis and accrual basis. Cash basis accounts for income when it’s received, while accrual bases record income when it’s earned. What’s the best method for your business?

Cash Basis Accounting

As stated above, with cash basis accounting revenues are recognized when cash is received and expenses are recognized when they are paid. This method is mostly used by individuals and small companies.

The Advantages of Cash Basis Accounting

1. Cash basis accounting is easier to understand
2. The cash basis method does not require the use of an accrual system
3. It’s a more accurate way of tracking income and expenses because you only record transactions when they actually occur
4. You can determine your profit or loss for the year by looking at your balance sheet and subtracting any liabilities from assets that are shown on it

Accrual Basis Accounting

As mentioned above, accrual basis accounting measures the performance of a company by recognizing economic events regardless of when cash transactions occur. Revenues are matched to expenses when the transaction occurs instead of when the payment is made or received.

The Advantages of Accrual Accounting

1. Accrual accounting is a more accurate way of measuring profitability
2. It allows for the recognition of revenues and expenses when they occur, rather than when cash is received or paid
3. The accrual method provides a better representation of economic activity as it includes revenue that has been earned but not yet collected and expenses that have been incurred but not yet paid
4. Accrual accounting can be used to measure performance over time periods other than one year, such as quarterly or monthly

Business owners have to decide between the cash basis or accrual basis of accounting. Being on one side of this debate is a major decision that will impact your company’s financials for years to come, so it’s important to understand the implications and make an informed decision.

Do you need help making a decision like this? Contact Halsey Resources. We’d be happy to discuss your options and give you our best advice.