Difference Between Accrual Accounting And Cash Accounting
This is a comprehensive guide to accrual accounting. Let’s start with understanding what accrual accounting is.
What is Accrual Accounting?
Accrual accounting is the art and science of recording, summarizing, classifying the revenues and expenses of the company whenever they happen even if the cash in yet to be received or yet to be paid.
Most of the companies follow accrual accounting because it takes care of the complexities of the accounting system. For sole proprietorship businesses, where the numbers of transactions are fewer, cash accounting would be ideal. But for companies with hundreds and thousands of transactions, accrual accounting fits the bill.
As most companies follow accrual accounting, there are few accounts …show more content…
And if the liability decreases, it will be debited. For example, if sundry creditor increased, it will be credited.
Incomes/Revenues: If the income increases, it will be credited. And if the income decreases, it will be debited. For example, when a company sells something, the “sale” account is credited.
Comparison between Accrual Accounting and Cash Accounting
The basic differences between accrual accounting and cash accounting are as follows –
Used by: Accrual accounting is used by businesses that have hundreds and thousands of transactions per year. It’s because accrual accounting can handle complex transactions quite easily. On the other hand, cash accounting is used by businesses that are limited in scope, e.g. sole proprietorship. Sole proprietorship businesses use cash accounting when the number of transactions is limited.
Time of recording the transactions: In the case of accrual accounting, the transactions are recorded when the income and the expenses happen no matter whether it is debit or credit; even if the cash is not yet received or paid. In the case of cash accounting, the transactions are recorded when the cash is paid or