Accrual vs cash accounting

Here’s a clear and complete comparison of Accrual vs. Cash Accounting, two fundamental methods for recording financial transactions:

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📘 1. Definition

Method	Definition
Cash Accounting	Records revenues and expenses only when cash is received or paid.
Accrual Accounting	Records revenues and expenses when they are earned or incurred, regardless of cash flow.

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📅 2. Timing of Transactions

Transaction Type	Cash Basis	Accrual Basis
Sales	Recorded when cash is received	Recorded when sale is made (even on credit)
Expenses	Recorded when paid	Recorded when incurred (even if unpaid)

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💼 3. Key Differences

Factor	Cash Accounting	Accrual Accounting
Simplicity	Very simple	More complex
Accuracy	Less accurate for matching income/expenses	More accurate for financial picture
Used By	Small businesses, individuals	Medium-large businesses, required by GAAP/IFRS
Example	A bill is recorded only when paid	A bill is recorded when received, even if paid later

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🧠 4. Example

Scenario:

You sell a product in June but get paid in July.

• Cash Accounting: Revenue recorded in July (when paid)

• Accrual Accounting: Revenue recorded in June (when sale happens)

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✅ 5. Pros and Cons

➤ Cash Accounting

Pros	Cons
Simple to maintain	Doesn’t reflect accounts receivable/payable
Real-time cash flow view	Poor matching of income & expenses

➤ Accrual Accounting

Pros	Cons
Accurate profit tracking	More complex system
Required for compliance	Doesn’t show actual cash available

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⚖️ 6. Which One to Use?

Business Type	Recommended Method
Small businesses with cash transactions	Cash accounting
Businesses with credit sales/purchases	Accrual accounting (more realistic)
Companies preparing audited financials	Accrual (mandatory under GAAP/IFRS)

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🧾 Summary Table

Feature	Cash Basis	Accrual Basis
Revenue timing	When cash received	When earned
Expense timing	When cash paid	When incurred
Simplicity	✅ Easy	❌ Complex
Matching principle	❌ No	✅ Yes
GAAP/IFRS compliance	❌ No	✅ Required