Different Accounting Methods: Accrual vs Cash Accounting

accrual-vs-cash-accounting

cash-and-accrual-basis-accounting

Accounting Methods

Accounting is essential for businesses to not only know their net worth or P&L but also the revenue and the expenses. Therefore, cash balance helps in determining the current and future of the business. There are two accounting methods in which you can record transactions:

1. Accrual accounting

2. Cash accounting

Accrual accounting method:

Accounting methods

 

 

 

 

 

Accrual accounting is one of the two Accounting Methods, where the user can maintain the record and also earn the revenue. Usually, income is a concept that is a record in the books of accounts even before there is a flow of cash into the business.

The revenue will be recorded as soon the product or service is deliver in an expectation that they will receive cash in the near future. Therefore, even the expenses of the business are record in the same manner, also though there is no cash paid.

For example, if the business receives a bill for electricity, the record of the transaction kept when they receive the invoice.

Cash flow accounting method:

Accounting methods

 

 

 

 

 

As the name suggests, recording of transactions happens only after when there is a substantial inflow or outflow of cash into the business.

  1. Record the Income and report on the cash flow statement only when they receive the cash.
  2. Record the expenses when they pay the cash.

As per the above example, the transaction in cash flow accounting only records when you pay the bill in full to the electricity board.

So, Cash flow accounting is use for cash flow analysis and accrual accounting for the income statement.

What is the difference between the Cash flow accounting methods and the Accrual accounting methods?

CategoriesCash Flow Accounting Accrual Accounting

Gist

Transactions are recorded in the books of accounts only when  there is inflow or outflow of cashTransactions are recorded in the writings of accounts as soon the revenue is earned, or the expense is incurred

Basis

Only cash incomes and expenses are recorded.All types of expenses and incomes are recorded.

Quality

Cash flow accounting is elementary in nature and is easily understandable.Accrual accounting is complex in nature and difficult to understand.

Recording

The transactions are only recorded after the income is received or the expense is paid.The transactions are recorded as soon as the revenue is earned, or the expense is incurred.

Accuracy

Records of cash flow accounting are not reliable as it does not maintain a complete account of all the transactionsAccrual accounting is very accurate as it records all transactions.

Recognition

Cash flow accounting is not accepted by the tax authorities.Accrual accounting is recognized by the tax authorities and the Companies Act.

Emphasis

Cash Flow accounting stresses the liquidity position of the business.Accrual accounting focuses on the profit or loss situation and on the whole picture of revenue and expenses.

Use

It helps the business to know about its liquidity position and the pattern of cash inflow and outflow.It gives a complete picture of how much profit or loss the business has incurred during a period.

Approach

Cash flow accounting is not a complete approach as it records only cash.Accrual accounting is a complete approach as it records all aspects of the business.

Therefore, Accounting Integrations in ZapERP follows the accrual method of accounting so that you can know the exact position of your business at the end of the day. In conclusion, not only that, ZapERP comes with many features like automatic invoicing, inventory management, Customer Relationship Management (CRM), and others that are required for a successful business.

Click here to sign up for Nowadays ZapERP is an important and essential tools for business needs.

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