Accrual- and cash-based accounting are two different methods that accountants use to prepare financial statements. Both are acceptable within IFRS (International Financial Reporting Standards).
The major difference between the methods is when revenues and expenses are recognized.
- Using the cash method, revenue is recorded when money comes in and expenses are recorded when they are paid. This is often considered the simplest method.
- Using the accrual method, revenue is recorded when a sale is made—whether or not cash is received at the time. Similarly, expenses are recorded when goods and services purchased are received, not when they are paid for.
The cash method is used predominantly in farming where long periods of time can elapse between the time bills are actually paid and revenues are received. It is also used in small cash-based businesses.
While the accrual method is more complex, it is the most frequently used method because it better matches the timing of revenues and expenses, yielding better management insights.
More about accrual- and cash-based accounting
The following examples help clarify how accrual and cash-based accounting work:
When recording revenues
If a small delivery business provides $2,500 worth of services on a given day, cash-based accounting will not record those sales until the customers actually pay. Accrual-based accounting would record the $2,500 as revenue right away.
When recording expenses
If a small delivery business got a fuel bill for $1,000, cash-based accounting would record the expense when the bill is paid, while accrual-based accounting would record the expense the moment the bill arrived.