Accrual Basis vs Cash Basis of Accounting
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Table of Content:
🔹 Accrual Basis vs Cash Basis of Accounting
| Feature | Accrual Basis of Accounting | Cash Basis of Accounting |
|---|---|---|
| Definition | Revenues and expenses are recorded when they are earned/incurred, regardless of when cash is received or paid. | Revenues and expenses are recorded only when cash is actually received or paid. |
| Focus | Matches income with related expenses (Matching Principle). | Focuses only on actual cash inflows and outflows. |
| When Revenue is Recorded | When goods/services are delivered (earned). | When payment is received in cash/bank. |
| When Expense is Recorded | When resources are consumed (incurred). | When payment is made in cash/bank. |
| Accuracy | Provides a true and fair view of financial performance. | Can give a misleading picture (profits may look high/low depending on timing of payments). |
| Compliance | Required by IFRS / GAAP (standard accounting). | Mostly used by very small businesses or individuals. |
| Example (Sales on Credit) | Sell goods worth $1,000 in January, customer pays in February → Record revenue in January. | Record revenue in February when cash is received. |
| Example (Expense) | Electricity bill of $200 for March (paid in April) → Record expense in March. | Record expense in April when paid. |
🔹 Quick Summary
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Accrual Basis → Record when earned/incurred (regardless of cash).
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Cash Basis → Record when cash is received/paid.
📌 That’s why large companies and accounting standards use Accrual Basis – it shows the real performance.