The timing when revenue and expenses are recorded is the key distinction between the cash vs. accrual method. Therefore, do you understand the difference?
Also, based on these two principles, you can define the two different accounting methods to use.
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Cash Vs. Accrual Method
Here are the differences, benefits, and accounting of the cash vs. accrual method.
Cash Method
Cash movement is recorded when a payment from a client is received (cash in) or when a payment from a supplier is made (cash out).
Furthermore, cash-based accounting recognizes revenues when cash is received and when expenses are paid. However, this method does not recognize accounts receivable or accounts payable.
Additionally, it’s easy to understand and display your current cash balance. Taxes are only due on money that has been received rather than on invoices that have been issued, which may improve the cash flow. Contrary to its name, cash basis accounting is unrelated to the payment method you accept.
As a result, you may do cash accounting while being paid online. Finally, small businesses use the cash-based method more often due to its simplicity.
Accrual Method
The accrual principle is revenue recorded when work is done or/product changed hands legally. Furthermore, expenses are recorded when the service is incurred or when a good is received.
Accrual accounting is a method where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid.
Moreover, you will have a lot more accurate view of the financial situation and business performance. Alsop, you have far greater confidence while making financial judgments. Therefore, this method is used by middle and big companies to reflect the economic reality of debit and credit positions as well as the income and expenses in a specific period of time.
Conclusion – Cash Vs. Accrual Method
To sum up, I suggest you use the accrual method if your company has a large amount of inventory. If you have a smaller company that doesn’t hold inventory, you will find the cash method to be more effective.
What do you think are the advantages of each of the methods?
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