What's the Difference between Accrual Accounting and Cash Accounting

Accrual vs Cash is the backbone of modern accounting.

Quite simple, accrual is when you recognise a transaction when it occurs independent of when the cash flows.

For example…
You sell 50 pineapples pineapple to a restaurant but they don’t want you to pay straight away, they want to pay in 60 days time.
You send them an invoice for $50 (as each pineapple is $1) and deliver the pineapples.
At this point you, your financial statement would show:
CASH = $0
ACCOUNTS RECEIVABLE (this is what someone owes you, kind of like an IOU) = $50

If however, you were using cash accounting, you only recognise things when you get cash in hand.
So… at this point when you’ve invoiced for the pineapples and delivered them your financial report would say:
CASH = $0

When you finally get the cash, you would then have:
CASH = $50

So what’s better? It really depends on your situation. A largely cash based business would probably use cash accounting whereas most businesses that have IOU’s will probably use the accrual method.

Next: How does the Chart of Accounts Work & Why is it Important?

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