Accrual Accounting Versus Cash Accounting

The accrual method of accounting stipulates that revenue or expense recognition occurs on the date that the transaction occurs, regardless of whether or not cash was paid or received.  For example, assume that your business sold 100 printers for $100,000, which will be be due to you within 3 months.  Under the accrual method, the $100,000 revenue will be recognized as of the date that the purchase order was made.

Cash Method Vs. Accrual Method


Accrual based accounting has its benefis and drawbacks when compared to its counterpart, the cash method of accounting

Cash accounting recognizes revenues and expenses on the date that the actual funds changed hands.  You can see that this form of accounting is more conservative and guarantees that the purchase or sale is completed from a point of monies exchanging hands before an entry is made into the books; removing the uncertainty around the accounts receivable that lies with the accrual based method and also giving the company an idea of the general timeframes around their accounts receivables being paid.  However, the cash method does fall short in the context understanding the timing of sales that are made.  Additionally, C corporations, tax shelters, and partnerships with a C corp partner cannot elect to use the cash method of accounting.

This is where accrual accounting has an advantage.  It allows companies to understanding spending habits of consumers and also plan better for peak months of operations.  However, companies need to be careful at the same time with their planning for the future as it is not guaranteed that their accounts receivables will be paid on time.
Tim Ord
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