accrual basis accounting vs cash basis accounting

In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. In other words, you record both revenues and expenses when they occur.


In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced).

The difference between the two types of accounting is when revenues and expenses are recorded.

Accrual basis accounting is the method of accounting most businesses and professionals are required to use by law.

Examples: Accrual basis accounting gives the most accurate picture of the financial state of your business.

Definition: In the accrual basis accounting system:

• Income is recorded when it is earned even if monies have not yet been received; and
• Expenses are recorded when they occur - not necessarily when they are actually paid.

Total revenues and expenses are shown in financial statements whether or not cash was received or paid out in a particular accounting period.
Cash basis accounting works on a strictly cash-in, cash-out basis; transactions are only recorded when money actually changes hands.

Also Known As: Accrual Accounting, Modified Accrual Basis Accounting

 

Definition:  

There are two types of bookkeeping methods businesses can use: the accrual basis or the cash basis accounting method. Cash basis recordkeeping works on a strictly cash-in, cash-out basis. That is, financial transactions are only recorded when money actually changes hands:

• You only record income (i.e., cash or a check) when monies/revenues are actually received; and
• Expenses are only recorded when they are actually paid.

 The United States Internal Revenue Service (IRS) allows businesses to use either method, or a combination of accrual basis and cash basis recordkeeping. However, whatever method you inform the IRS that you have chosen during the first year of your business you must continue to use.
If you wish to change accounting methods you are required to get permission from the IRS in advance.

Also Known As: Cash Basis Recordkeeping