Bookkeeping: Cash vs. Accrual

Within accounting and bookkeeping, two types of accounting methods are utilized to record transactions.  These methods are at the core of both the accounting and bookkeeping functions.  They include:

• Cash Accounting – which recognizes revenue and expenses only when money changes hands.
• Accrual Accounting – which recognizes revenue when it is earned and expenses when they are incurred or obligated (separate from the time at which they may be paid).

To ensure your entity is properly recording and tracking transactions, it is important to understand the basic variances between cash and accrual accounting and when they are best utilized. It’s pretty much “all in” once you make this decision.

The cash approach may be preferred where all or most of the following conditions apply; the company uses single-entry accounting, has relatively few financial transactions per day, does not sell on credit (does not deliver goods or services and then invoice customers for payment later), at the time of sale customers must pay either by cash, written check, bank transfer, or 3rd-party credit/debit card, and, finally, has very few employees.

The accrual basis is used by all larger companies, for several reasons. Its use is required for tax reporting when sales exceed $5 million, for public companies that trade shares on stock exchanges which are required to follow GAAP which requires accrual-based accounting, and when investors want the most accurate picture possible of the state of a company’s finances. A company’s financial statements can only be audited if they have been prepared using the accrual basis. 

This course examines how each method impacts a business’ financial position and financial statements.  We utilize various scenarios and compare and contrast the two methods.

NOTE: This course is one of a series of courses developed for the Professional Bookkeeping Certification program on Illumeo. The full curriculum of courses will provide you with the ultimate foundation to a career as a bookkeeper. 

Note: Information within this course comes from readily available public domain documents and is utilized by the trainer as a supplement for relaying the course content.