Understanding Accrual and Cash basis accounting!

Keeping track of a business' income and expenses becomes easy with cash accounting and accrual accounting, the two principle

methods of accounting. The accrual accounting is used to record revenue and expenses in the period in which they are earned or

incurred irrespective of the cash flow. However, in cash accounting basis, revenue is recognized only when cash is received from the

customer while expenses are recorded when cash is paid.

Accrual Accounting Basis• Accrual Accounting is being used by most of the companies.• The income is reported when earned and expenses are reported

when incurred. • Companies can decide when to recognize revenue and expenses,

under certain rules and principles governing the recognition. • The companies following Accrual Accounting system are required

to make estimation against the revenue recorded but may not receive.

Accrual Accounting Basis• It is a standardized method of accounting as it provides a more

accurate picture of company’s current operations. • The need of this method arises due to the complexities faced by the

company in terms of depicting true picture of the business. • Selling items on credit provides revenue over a long period of time

and thus reporting such events on financial statements in the same reporting period is necessary.

Cash Accounting Basis• It is the simplest method of accounting. • Transactions are recorded only on the actual flow of cash in or out

of business.• Revenue is recognized only when cash is received from the

customer while expenses are recorded only when cash is paid.• There cannot be any match of the revenue against expenses in an

accounting period. • Cash Accounting is ideal for sole proprietors or businesses with no

inventory. • Cash basis is considered beneficial from the taxation point of view

as recording income can be put off to the next year and expenses can be booked immediately.

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