Cash or Accrual Basis?

The main difference between cash and accrual accounting lies in the timing of when revenues and expenses are recognized:

1. Cash Accounting:

   • Revenues are recorded when cash is actually received.

   • Expenses are recorded when cash is actually paid out.

   • This method provides a straightforward view of cash flow and is commonly used by small businesses and individuals.

2. Accrual Accounting:

   • Revenues are recognized when they are earned, regardless of when the cash is received.

   • Expenses are recognized when they are incurred, not necessarily when cash is paid.

   • This method provides a more accurate picture of a company’s financial position and performance since it matches revenues with the expenses incurred to generate them.

In summary, cash accounting focuses on cash flow, while accrual accounting provides a more comprehensive view of a company’s financial performance over time.

Most small companies use the cash method simply because it is easier and it represents their books sufficiently. Give me a call if you want to discuss whether your books should be on a cash or accrual basis.