Cash vs accrual basis of accounting are two methods of recording transactions for a business.
Under the cash 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 revenues.
Cash vs Accrual Comparison
As an example consider a startup business which sells a product to customers on 30 day credit terms for 100.
Cash Accounting Method
Under the cash basis 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.
When the cash is received the following entry is recorded.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100 | |
| Sales | 100 | |
| Total | 100 | 100 |
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.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 100 | |
| Sales | 100 | |
| Total | 100 | 100 |
After 30 days the customer pays and the cash is received, the following entry is recorded.
| Account | Debit | Credit | Cash | 100 |
|---|---|---|
| Accounts receivable | 100 | |
| Total | 100 | 100 |
We can see that the difference in the cash vs accrual methods is the timing of the recording of the transactions.
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.