Cash vs Accrual Accounting Explained With A Story

21 January 2020 Unleash your inner Financial ProShow more

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There are 2 different accounting methods: Cash Accounting and Accrual Accounting. In this video I will show you the difference between accrual basis versus cash basis of accounting by telling you a story. You will get a quick overview how each of these methods impacts the timing of recording a company's transactions.

In Cash Accounting companies record transactions only when cash is exchanged. This means that revenue is recorded only when cash is received. And expenses are recorded only when cash is paid. Therefore, this method is intuitive and simple to understand. It helps you keep track of your cash balance, easy to apply, and an accepted accounting method also for tax purposes. Cash accounting method can be your accounting method of choice especially if your business is small and simple, and mainly cash based. On the other hand, cash accounting may not provide a full picture of the business at a certain point in time.

In Accrual Accounting companies record transactions when they happen rather than when cash changes hands. Revenue is recorded when earned, meaning when a sale is made and the products or services are delivered to the customer. Even if the customer hasn't paid yet. Expenses are recorded when incurred regardless even if they've not been paid to the supplier yet. Accrual Accounting provides a much better picture of what is happening in a business. If the company reports under GAAP or IFRS then Accrual Accounting is the accepted method. However, it does not focus on cash flows which is why reported income under this method does not equal cash-in.

00:56 What is Cash Accounting
02:38 Accrual Accounting Explained
03:27 Cash and Accrual Accounting explained with a Story
09:13 Advantages and Disadvantages for both methods

Check out the full article here: https://www.xelplus.com/cash-vs-accrual-accounting

In the next video of our accounting basics series, we'll take a look at the Cash Flow Statement.

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