🎓 Accrual vs. Cash Basis Accounting
Cash Basis Accounting
•Records income and expenses only when cash is exchanged.
•Example: You finish a project in October but record income in November when payment is received.
•Pros: Simple, shows cash flow.
•Cons: Can miss the full financial picture.
Accrual Basis Accounting
•Records income and expenses when they’re earned or incurred, regardless of payment.
•Example: The same project would be recorded in October, even if payment comes in November.
•Pros: Accurate picture of financial health.
•Cons: More complex, requires tracking cash flow separately.
Why It Matters
•Cash basis is simpler; accrual provides a clearer view for growing businesses. Most larger businesses use accrual for accuracy in financial reporting.
This quick breakdown helps businesses decide which method suits their needs best.
Cash Basis Accounting
•Records income and expenses only when cash is exchanged.
•Example: You finish a project in October but record income in November when payment is received.
•Pros: Simple, shows cash flow.
•Cons: Can miss the full financial picture.
Accrual Basis Accounting
•Records income and expenses when they’re earned or incurred, regardless of payment.
•Example: The same project would be recorded in October, even if payment comes in November.
•Pros: Accurate picture of financial health.
•Cons: More complex, requires tracking cash flow separately.
Why It Matters
•Cash basis is simpler; accrual provides a clearer view for growing businesses. Most larger businesses use accrual for accuracy in financial reporting.
This quick breakdown helps businesses decide which method suits their needs best.