The difference between accrual and cash bases in bookkeeping

The difference between the accrual basis and the cash basis in accounting boils down to one factor: time.

These are two different methods of accounting that determine when revenues and expenses are recognized in financial statements. Here's an explanation of the difference between the two:

Accrual Basis

This method of bookkeeping records transactions when they occur, regardless of when the actual cash is received or paid. Under this method, revenues are recognized when they are earned, and expenses are recognized when they are incurred, regardless of whether the cash has been exchanged. It focuses on matching revenues and expenses to the period in which they occur, providing a more accurate picture of a business's financial performance.

For example, if a company provides services to a customer in December but doesn't receive payment until January, the revenue would still be recorded in December under the accrual basis, as that is when the service was provided.

Cash Basis

Under this method, on the other hand, revenues and expenses are only recognised when cash is actually received or paid. It focuses solely on cash inflows and outflows, disregarding the timing of when the related transactions occur. This method is simpler and more straightforward, especially for small businesses with straightforward financial transactions.

Using the same example as above, under cash basis bookkeeping, the revenue would be recognized in January when the cash is received, as it focuses on the actual cash movement.

It's important to note that the choice between accrual basis and cash basis bookkeeping has implications for financial reporting, tax obligations, and overall understanding of a company's financial position. Generally, larger businesses or those with more complex transactions tend to use accrual basis bookkeeping, as it provides a more comprehensive view of their financial activities. However, small businesses or individuals may opt for cash basis bookkeeping due to its simplicity and direct correlation to cash flows.

Under either method, whether you are ready to start or wish to discuss which one suits your business, Vookeeper can help.