Cash-basis and Accrual-basis Accounting

In cash basis accounting, income is recognized when it’s received and expense is recognized when it’s paid. The date when the sale is made or the expense is incurred is not significant in cash basis accounting method.

In accrual basis accounting, income is recognized when it’s earned, realized or realizable. Expense is recognized when related revenue is recognized.

Terms:
“revenue is earned”: it means either products are delivered or services are provided
“revenue is received”: Revenue is received when a deposit is made or a payment is received.
“revenue is realized”: Revenue is realized when cash for products or services is received.
“revenue is realizable”: it means that cash is expected to be received.

Comparison:
Cash-basis accounting is simpler, therefore it’s easy and quick to maintain. Not much effort is needed to match revenues or expenses for the given time period.

Accrual-basis accounting method is more complicated, but it’s allowed to track receivables and payables. As it matches revenues to the related expenses, financial reports make more sense and give more information.

Which one to choose?
If business doesn’t sell goods or services on credit, and pay expenses when they are incurred, cash-basis accounting is the way to go. On the contrary, when business makes sales on credit, accrual basis accounting makes more sense.

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