Cash vs Accrual Accounting

Cash vs Accrual Accounting
Cash and accrual accounting are two primary methods of recording financial transactions. The key difference between them lies in the timing of when revenues and expenses are recognized.

🔹 1. Cash Accounting
Definition:
Revenue and expenses are recorded only when cash is actually received or paid.

✅ Advantages:
Simple and easy to maintain

Clear view of actual cash on hand

Useful for small businesses and sole proprietors

❌ Disadvantages:
Doesn’t show money that is owed (accounts receivable or payable)

Can give a misleading picture of profitability (especially if large amounts are unpaid)

📘 Example:
You send an invoice in March and get paid in April.

Under cash accounting, the income is recorded in April.

🔹 2. Accrual Accounting
Definition:
Revenue and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid.

✅ Advantages:
More accurate picture of financial health

Complies with Generally Accepted Accounting Principles (GAAP)

Useful for medium to large businesses

❌ Disadvantages:
More complex and time-consuming

Cash flow may not be immediately obvious

📘 Example:
You send an invoice in March and get paid in April.

Under accrual accounting, the income is recorded in March.

🧾 Key Differences Table
Feature Cash Accounting Accrual Accounting
Timing When cash is received/paid When revenue is earned/expenses incurred
Complexity Simple More complex
Accuracy of Financials Less accurate More accurate
GAAP Compliance Not compliant GAAP compliant
Tax Impact (India) Allowed for individuals & small businesses under presumptive scheme Required for companies & large entities

🔍 Which One Should You Use?
Business Type Recommended Method
Freelancer or small trader Cash (if eligible)
Large company or startup Accrual
Required by law (e.g., company under Companies Act) Accrual