Cash basis vs. Accrual basis Accounting
The cash basis and accrual basis of accounting are two different methods used to record accounting transactions. The core underlying difference between the two methods is in the timing of transaction recording.
When aggregated over time, the results of the two methods are approximately the same. A brief description of each method follows:
Cash Basis Accounting: Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.
Accrual basis Accounting: Revenue is recorded when earned and expenses are recorded when consumed.
The timing difference between the two methods occurs because revenue recognition is delayed under the cash basis until customer payments arrive at the company. Similarly, the recognition of expenses under the cash basis can be delayed until such time as a supplier invoice is paid. To apply these concepts, here are several examples:
Revenue recognition: A company sells $10,000 of green widgets to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice.
Expense recognition: A company buys $500 of office supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual basis, the buyer recognizes the purchase in May, when it receives the supplier's invoice.