What Is the Difference Between Cash Basis & Accrual Basis Accounting?

The accrual basis system of accounting and the cash basis system of accounting are two ways for companies to maintain their accounts. They are based on different principles, and there are major differences between the systems.

When the Money Is Earned

In the accrual system, a company records revenue whenever the money is earned rather than waiting to actually receive a cash payment. For instance, if a customer orders goods and agrees to pay after three months, the company can record the revenue as soon as the sale occurs even though it has not received the money yet.

When the Money Is Received

Under the cash basis system, a company waits to actually receive the money before recording it as revenue.

Record Expenses as They Occur

Similarly, companies using the accrual basis record expenses as they incur them. They don’t have to wait until they actually pay out the money. If a company orders goods from its suppliers, it should record the expense whenever it places the order rather than wait until it actually makes the payment a month or two later.

When the Money Is Paid Out

Under the cash basis system, companies record an expense only when they actually pay out the money.

Public Companies Versus Smaller Ones

Publicly traded companies follow the accrual basis of accounting, and smaller companies mostly follow the cash basis of accounting.

References

• Microsoft: About Cash Basis and Accrual Basis Accounting