Cash Basis vs. Accrual Basis Accounting (Video)

You may have heard people talk about cash versus accrual accounting, but what is it all about? Here is what you need to know.

At its core, the main difference comes down to timing.  Cash basis accounting is when you record your revenue or expenses at the time you receive money or pay a bill and the accrual basis of accounting is when you record your revenue or expenses when you generate an invoice or receive a bill.

Cash Basis Accounting

Cash basis accounting is when a business recognizes income and expenses only when money changes hands. They don’t count bills or invoices unless the money has already been exchanged. It in fact does not have anything to do with the form in which your receive the money. It can be an electronic payment, cash, check, etc. but  it is still  considered  to be cash basis accounting. This is the most-commonly used method by sole proprietors and businesses with no inventory.

Accrual Basis Accounting

Accrual basis accounting is when a business recognizes income as soon as an invoice  is generated and shared with a customer. Similarly, when a bill comes in, it will be recognized as an expense even if that payment hasn’t been made yet.

Hybrid Method

Some businesses use a hybrid method which is a blend between both forms of accounting. For example, some businesses may use both cash income  and accruals to help determine cash flow and budgeting for future months.  They may also use a hybrid method to help with inventory management and ordering supplies.

There are many rules determining who can and can’t use the hybrid method so it is important to speak to an accountant or CPA to make sure you are using the correct method for your business. Visit our website or give us a call to learn more and get started today.