Definition of Cash Accounting
The basis of accounting in which the revenues and expenses are recognized only when cash is actually received or paid. In cash accounting method, the income or expense is recognised when the inflow or outflow of cash exists in reality.
The Cash basis of accounting method is mostly used by sole traders, proprietors and other professionals who record their income when there is an actual inflow of cash and expenses of the entity.
Definition of Accrual Accounting
Accrual system of Accounting is also known as the mercantile system of accounting wherein the transactions are recognized and recorded as and when they take place. Under the accrual accounting method, the revenue is recorded when it is actually earned, and the expenses are reported when they are incurred.
The accrual method of accounting is used by most of the entities as it records the past transactions regarding the revenue and expense, but it also predicts the cash receipts and payments expected to arise in the future.
6 Major Differences between Cash Basis of Accounting and Accrual Basis of Accounting
|BASIS||CASH BASIS OF ACCOUNTING||ACCRUAL BASIS OF ACCOUNTING|
|Meaning||The method of accounting in cash basis is when the income or expense is recognized only when there is an actual inflow or outflow of cash.||The method of accounting in accrual basis is when the income or expense is recognized on mercantile basis or accrual basis.|
|Nature||The nature of cash accounting is simple.||The nature of accrual accounting is complex|
|Method||The method of cash basis of accounting is not recognized under the Companies Act.||The method of accrual basis of accounting is recognized under the Companies Act.|
|Revenue Recognition||The revenue is recognized when Cash is received.||The revenue is recognized when revenue is earned.|
|Expense Recognition||The expense is recognized when Cash is paid.||The expense is recognized when expense is incurred.|
|Matching Concept||Matching Concept is not applicable.||Matching Concept is applicable.|