What is the difference between accrual and cash accounting?

Question

Zippia Team · Accepted Answer

The difference between accrual and cash accounting comes down to the timing of when sales and purchases are recorded in accounts. In cash accounting, you will record revenue and expenses when the money changes hands. For accrual accounting, you will recognize and record revenue when it's earned and bills when they are billed, but not necessarily paid.

Cash accounting does not recognize accounts payable or accounts billable. This makes it a more simple process, which can be beneficial for smaller businesses. Since you don't record transactions until the money is paid or received, it also means that the income of the business isn't taxed until the business physically has that money.

Accrual accounting is the more common method. It records sales and purchases once you get a bill or raise revenue. For example, you would record revenue once a project is completed, not when you're paid for the project. This helps a business to more fully understand long-term spending and income.