Cash Basis vs. Accrual Basis Accounting
Cash basis accounting and the accrual basis accounting are two accounting methods used to keep track of a business’s income and expenses. In accrual basis accounting, revenue is recorded as it is earned and expenses are recorded when they generate revenue. Under cash basis accounting, only transactions involving increases or decreases of the entity’s cash are recorded. One of the major differences is the reporting of net income and net cash flows from operations.
The cash basis is the more commonly used method of accounting by individuals and small businesses with sales of less than $5 million per year whereas accrual basis is used by large companies and is required of corporations whose stock is publicly traded. With accrual basis accounting being more complex, it provides more financial information about a company, therefore, providing more meaningful financial reports. Cash basis accounting is the simple method.
It provides a more accurate picture of how much actual cash your business has because it only deals with cash transactions. Companies record transaction when they have an increase or decrease of cash. However, this doesn’t give you a clear picture of a company’s operations and financial performance. In summary, the difference is the timing when transactions, including sales and purchases, are credited or debited to your account. If your business is simple, then cash basis will do, but accrual basis provides the “big” picture of business operations.