Accrual accounting and cash accounting are two distinct methods that accountants use to prepare financial statements . Both methods comply with NIIF (International Financial Reporting Standards) .
The main difference between the two methods is when income and expenses are recognized.
Using the cash method, revenue is recognized when funds are received and expenses when paid. This method is often considered to be the simplest.
Under the accrual method, revenue is recognized when the sale is made, whether or not funds are received at the time of sale. Expenses, on the other hand, are recorded when the business receives the goods and services purchased, not when it pays for them.
The cash method is used primarily in the agricultural sector, where long periods can elapse between when bills are paid and revenues are received. It is also used for small businesses that have opted for cash accounting.
Although the exercise method is more complex, it is the most frequently used because it better corresponds to the dates of entry and exit of funds, giving a better management picture.
Learn more about accrual accounting and cash accounting
The following examples help clarify how accrual accounting and cash accounting work:
When revenue is recorded
Let’s say a small delivery business provides services worth $2,500 on a given day. Under cash accounting, these sales will not be recorded until the customers have paid. Under accrual accounting, they will be immediately.
When Expenses Are Recorded
Let’s say a small delivery business receives a fuel bill for $1,000. Under cash accounting, the expense is recorded when the invoice is paid. Under accrual accounting, it is instead recorded when the company receives the invoice.