Cash and accrual accounting are the two main methods of any accounting system which a business can use. Both are used in different industries. Accrual accounting is used more than cash accounting method. Still, you should know both and understand their differences also.
1. Recognize the Income and Expenses
In cash accounting method, you recognize the income when you will receive it in cash. You will recognize the expenses when you will pay it.
In accrual accounting method, you recognize the income when you will sell the products or services and other will have the obligation to pay your sale amount or service fees. Like this, you will recognize your expenses when you will have obligation to pay the bought amount or to pay for obtained services.
2. Grant Award
In cash accounting method, You will record when you will get the cheque of your sold amount or you pay the expenses through cheque issue.
In accrual accounting method, you will record when you will get the promise from your debtor. In his or her promise, he will say to pay the amount on specific date. Whether he pay or not, you will have the right to record your sale and same amount will become the debt on your debtor and it will be assets in your books. If you will pay or not but on the due date of your bill payment will be the date of record of your expenses.
3. Example
In cash accounting method - For example, you get advance fees of checking your patient. It is your earned income.
In accrual accounting method - For example, you have checked your patient and give your advice. At same time, you have earned the income. No problem whether there is no money in the pocket of your patient, he will pay you tomorrow or after next week meeting.
4. Impact on Income Statement
If you will follow cash accounting method, your cash book will be income statement if you will delete the payments for fixed assets and receipt from loan.
If you follow accrual accounting, you need to make income statement separately. Your income statement will also include the income which are receivables. In your income statement, there are expenses which are due but not paid.
5. Impact on Balance Sheet
If you will follow cash accounting method, there will not account receivables and account payable in your balance sheet.
If you will follow accrual accounting method, you need to show account receivables outstanding expenses, outstanding revenue, advance income and advance expenses and account payable in balance sheet.
1. Recognize the Income and Expenses
In cash accounting method, you recognize the income when you will receive it in cash. You will recognize the expenses when you will pay it.
In accrual accounting method, you recognize the income when you will sell the products or services and other will have the obligation to pay your sale amount or service fees. Like this, you will recognize your expenses when you will have obligation to pay the bought amount or to pay for obtained services.
2. Grant Award
In cash accounting method, You will record when you will get the cheque of your sold amount or you pay the expenses through cheque issue.
In accrual accounting method, you will record when you will get the promise from your debtor. In his or her promise, he will say to pay the amount on specific date. Whether he pay or not, you will have the right to record your sale and same amount will become the debt on your debtor and it will be assets in your books. If you will pay or not but on the due date of your bill payment will be the date of record of your expenses.
3. Example
In cash accounting method - For example, you get advance fees of checking your patient. It is your earned income.
In accrual accounting method - For example, you have checked your patient and give your advice. At same time, you have earned the income. No problem whether there is no money in the pocket of your patient, he will pay you tomorrow or after next week meeting.
4. Impact on Income Statement
If you will follow cash accounting method, your cash book will be income statement if you will delete the payments for fixed assets and receipt from loan.
If you follow accrual accounting, you need to make income statement separately. Your income statement will also include the income which are receivables. In your income statement, there are expenses which are due but not paid.
5. Impact on Balance Sheet
If you will follow cash accounting method, there will not account receivables and account payable in your balance sheet.
If you will follow accrual accounting method, you need to show account receivables outstanding expenses, outstanding revenue, advance income and advance expenses and account payable in balance sheet.
Comments