Cash and Accrual Accounting are two different ways of accounting for business transactions in your business. Both are legitimate – and in most cases, either one is an acceptable approach. However, if you start with one, you have to stay with it. The two approaches differ in the timing of when transactions are credited or debited from your accounts.

Accrual Accounting (also called Accrual Method or Accrual Basis), is the more common method of the two. Transactions are accounted for when the order is placed, or the item is delivered, or the services occur – regardless of when the payment actually happens. The actual exchange of money is treated separately, as either a Receivable or a Payable. The benefit of Accrual Accounting is that transactions (like sales) are accounted for immediately – even if the payment isn’t due. Accountants feel that Accrual Accounting provides a truer picture of a company’s operations.

With Cash Accounting (also called Cash Method or Cash Basis), transactions are only recorded when the money actually changes hands. A sale transaction s recorded when a customer payment is accepted, and a purchase transaction is recorded when the actual payment is made. Most individuals use the cash method for their personal finances because it's simpler and less time-consuming. However, this method can distort your income and expenses, especially if you extend credit to your customers, if you buy on credit from your suppliers, or if you maintain an inventory of the products you sell.

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Dec 23, 2008 14:27 EDT

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