Cash vs Accrual Accounting

Cash vs accrual basis of accounting are two methods of recording transactions for a business.

Under the cash method of accounting basis, transactions are recorded when cash is received or paid, under the accrual basis revenue is recorded when earned and expenses are recorded when incurred.

The accrual method is the preferred method as it complies with the matching principle in accordance with generally accepted accounting standards which ensures that expenses are matched with revenues.

cash vs accrual accounting

Cash vs Accrual Comparison – Payments

As an example consider a startup business with a year end of 31 December 2018. On the 20 December 2018 the business purchases a product from a supplier on 30 day credit terms for 150.

Cash Accounting Method

Under the cash basis of accounting no record is made at the date of the purchase as the cash is not paid until the 30 days credit period has expired (20 January 2019).

When the cash is paid the following entry is recorded.

Cash vs Accrual Accounting – Cash Basis Paid
Account Debit Credit
Purchases 150
Cash 150
Total 150 150

Accrual Accounting Method

Under the accrual basis of accounting, the transaction is recorded when the purchase is made. As no cash is paid at this point, the credit entry goes to the accounts payable account, representing money owed to the supplier.

Cash vs Accrual – Accrual Basis Purchase Made
Account Debit Credit
Purchases 150
Accounts payable 150
Total 150 150

After 30 days the supplier is paid, the following entry is recorded.

Cash vs Accrual – Accrual Basis Cash Paid
Account Debit Credit
Accounts payable 150
Cash 150
Total 150 150

In the above case after 30 days the net effect of both the accrual basis entries is to debit purchases and credit cash, the same as the cash basis of accounting.

Cash vs Accrual Comparison – Receipts

Assume the business now sells the product on the 20 December 2018 to customers on 30 day credit terms for 200.

Cash Accounting Method

Under the cash method of accounting of accounting no record is made at the date of the sale as the cash is not received until the 30 days credit period has expired (20 January 2019).

When the cash is received the following entry is recorded.

Cash vs Accrual – Cash Basis Receipt
Account Debit Credit
Cash 200
Sales 200
Total 200 200

Accrual Accounting Method

Under the accrual basis of accounting, the transaction is recorded when the revenue is earned (when the sale is made). As no cash is received at this point, the debit entry goes to the accounts receivable account, representing money due from the customer.

Cash vs Accrual – Accrual Basis Sale Made
Account Debit Credit
Accounts receivable 200
Sales 200
Total 200 200

After 30 days the customer pays and the cash is received, the following entry is recorded.

Cash vs Accrual – Accrual Basis Cash Receipt
Account Debit Credit
Cash 200
Accounts receivable 200
Total 200 200

In the above case after 30 days the net effect of both the accrual basis entries is to debit cash and credit sales, the same as the cash basis of accounting.

Cash vs Accrual Income Statement

The income statement for the business is produced at the end of the month 31 December 2018.

Accrual Accounting Method

Using the accruals accounting method the transactions are recorded when the purchase or sale takes place (20 December 2018) and therefore at the month end (30 December) both transactions have been recorded in the accounting records.

Assuming there is no change in inventory the income statement will be as follows.

Income Statement month ended December 31 2018
Sales 200
Cost of Sales 150
Net income 50

In the following month the cash receipts and payments are recorded in the accounting records and affect only accounts receivable and payable which are both balance sheet accounts.

Assuming there are no additional sales and purchases transactions an income statement produced at the end of January would show a net income of zero as follows.

Income Statement month ended January 2019
Sales 0
Cost of Sales 0
Net income 0

Cash Accounting Method

Using the cash accounting method the business only records cash receipts and payments. Since the cash payment and cash receipt did not occur until 20 January 2019 there are no transactions recorded in the accounting records and the business shows a net income for the month ended December 2018 of zero.

Income Statement month ended December 2018
Receipts 0
Payments 0
Net income 0

In the following month the cash receipts and payments are recorded in the accounting records and an income statement produced at the end of January would appear as follows.

Income Statement month ended January 2019
Receipts 200
Payments 150
Net income 50
Last modified September 26th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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