THE DIFFERENT BETWEEN CASH AND ACCRUAL ACCOUNTING

 

1. Cash Accounting:

a) Is an accounting method that records revenue and expenses when actual payments are received or disbursed. It doesn’t account for either when the transactions that create them occur.

b) It is cash method that accounts for cash paid or received.

NOTE: In this method Expenses are recorded only when cash is paid out. This method is used by small businesses and for personal finances.

2. Accrual Accounting:

a) Is an accounting method that records revenues and expenses before payments are received or issued.

b) This method records revenue when a sales transactions occurs. It records expenses when a transaction for the purchase of goods or service occurs.

c) This accounting method that records revenue and expenses when those transactions occur and before any money is received or paid out.

NOTE: The accrual accounting method is commonly used by public companies, county governments and government agencies. The Kenyan government is planning to implement this method in all government ministries, for now these ministries heavily depend on exchequer from the national treasury.

I. Special considerations from these two accounting methods

Cash Accounting

It records the cash that Is being received or paid to the business. For example, the business that sell machinery, sells machinery worth 5k. Under cash accounting the amount is not recorded in the books until the customer hands you the money.

             Accrual Accounting

This method it smoothens the revenues and expenses as they are generated in the future. For example, the business that sell machinery, sells machinery worth 5k. Under accrual accounting 5k is recorded as revenue as of the day of sale was made, though you may receive the money few days, weeks, or even months later.

1. Cash Accounting

Advantages

1) It records revenue and expenses when cash related to those transactions are received

2) The method is mainly used by sole proprietors and smaller businesses.

3) It only accounts for cash paid or received

4) Tracking cash flow of a business is easier.

5) Money is paid on time. Disadvantages

1) Might overstate the health of a company that is cash-rich

2) It doesn’t record accounts payable that might exceed the cash on the books and the company’s current stream.

3) Using this method investor might conclude that the business is making profit when in reality the business might be facing financial difficulties.

4) Cash accounting is not accepted under general accepted accounting principles(GAAP)

2. Accrual Accounting

Advantages

1) It records revenue and expenses when transactions occur but before money is received.

2) It provides more accurate overview of a company’s health by including accounts payable and account receivable.

3) This method is commonly used by large publicly-traded companies, county governments, government agencies.

4) It smooths out earnings over time.

5) Money is paid in future.

6) It is acceptable by generally accepted accounting principles(GAAP).

Disadvantages

1) This method doesn’t track cash flow.

2) It is more complicated to use since it is necessary to account for items like unearned revenue and prepaid expenses.

3) It requires added staff

4) It is used by companies that file audited financial statements and is accepted under the generally accepted accounting principles(GAAP).

NOTE THAT: The main difference between accrual and cash accounting is the time which the revenue and expenses are paid.

The cash accounting provides an immediate payment of revenue and expenses, while the accrual accounting focuses on the future payment of the revenue and expenses.