What is Accrual Basis Accounting vs. Cash Based Accounting?

Accrual Basis Accounting

Accrual basis accounting refers to a major accounting method that recognizes revenues and expenses at the time a transaction occurs, regardless of when cash is exchanged. Accountants using this method record financial transactions as soon as the invoices are sent/received and money is pledged. Accrual basis accounting is generally considered the standard accounting practice among most organizations. In contrast to cash basis accounting, accrual basis accounting is often viewed as a more accurate portrayal of your financial activity as it includes services provided or received that have not yet been paid for.

Cash Basis Accounting

Cash basis accounting refers to a major accounting method that recognizes revenues and expenses at the time cash is received or paid out. Accountants using this method record financial transactions as soon as invoices are paid or cash is deposited. Because cash basis accounting records transactions only at the point cash is exchanged, this is often viewed as a less accurate method of accounting. However, small organizations that do not carry inventory might use this method, as it provides a picture of cash available on hand and is generally a simpler and less expensive method of accounting. Cash basis accounting is in contrast to accrual basis accounting.

NEXTSTEPS | 11.16.20

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