Accounting is essential for businesses to not only know their net worth or P&L but also the revenue and the expenses. Cash balance helps in determining the current and future of the business. There are two accounting methods in which a transaction is recorded:
1. Accrual accounting
2. Cash accounting
Accrual accounting method:
Accrual accounting is one of the two Accounting Methods wherein, the transactions are recorded when the revenue is earned. Usually, revenue is a concept that is recorded in the books of accounts even before there is a flow of cash into the business.
The income will be recorded as soon the product or service is delivered in an expectation that they will receive cash in the near future. Even the expenses of the business are recorded in the same manner even though there is no cash paid.
For example, if the business receives a bill for electricity, the transaction is recorded on the day the bill is received.
Cash flow accounting method:
As the name suggests, recording of transactions happens only after when there is a physical inflow or outflow of cash into the business. Cash flow accounting is mostly used sole proprietors and small businesses
- Income is recorded and reported on the cash flow statement only when the cash is received.
- Expenses are only recorded when the cash is paid.
As per the above example, the transaction in cash flow accounting is only recorded when the bill is paid in full to the electricity board.
Cash flow accounting is used for cash flow analysis and accrual accounting for the income statement.
What is the difference between the Cash flow accounting method and the Accrual accounting method?
|Categories||Cash Flow Accounting||Accrual Accounting|
|Transactions are recorded in the books of accounts only when there is inflow or outflow of cash||Transactions are recorded in the books of accounts as soon the revenue is earned, or the expense is incurred|
|Only cash incomes and expenses are recorded.||All type of expenses and incomes are recorded.|
|Cash flow accounting is elementary in nature and is easily understandable.||Accrual accounting is complex in nature and difficult to understand.|
|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.|
|Records of cash flow accounting are not reliable as it does not maintain a complete account of all the transactions||Accrual accounting is very accurate as it records all transactions.|
|Cash flow accounting is not accepted by the tax authorities.||Accrual accounting is recognized by the tax authorities and the Companies Act.|
|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.|
|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.|
|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.|
The accrual accounting method is prominently used by companies as it reflects the true position of the business at a given point of time. Online accounting software like ZapERP and others follow the accrual method of accounting so that you can know the exact position of your business at the end of the day. 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.
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