Difference between Accrual & Cash Accounting and Impact on Your Business (CPA explains)

Accounting is about recording things and how we record it. What’s accrual accounting then? It’s “how” you record – essentially it’s a way of recording or recognising sales or payments when things happen, not necessarily when things are paid in cash.

The difference that arises is due to when things are bought on credit versus cash that's ultimately paid or received.

If you want to watch a video that explains what the difference is between accrual and cash accounting is, check this video out (otherwise read on):

For example, you own a hot dog stand, and you sell the hot dog on credit so the person doesn’t pay money for their hotdog.

Instead, they give you an IOU.

If your hot dog business selects to use accrual accounting as the way you want to do accounting, then you would record the sale at the point you recorded the IOU i.e. when you gave them the hot dog.

Remember, at this point, you haven’t received any cash.

If instead your hot dog business doesn’t use accrual accounting, but uses cash, no sale would be recognised because cash wasn’t received.

However, if the customer comes back and pays his IOU in cash, then at the point when the cash is paid, a sale is recorded.

Very slight difference there and it’s all down to… timing. How you record your sales and purchases (i.e. doing your accounting) is affected by timing.

Likewise, if business selected to use accrual accounting as their method of accounting, if they purchased a radio, then the purchase is recorded. If they use cash accounting, then this purchase isn’t recognised as a purchase until they actually pay for it.

It’s a simple definition, accrual accounting is just a selection to say how you’re going to record things when they happen, not when cash has changed hand, and be it a sale or purchase.

Next: What is an Account? What's a Balance? (Easy Definition)

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