To understand the Difference Between Cash Accounting and Accrual Accounting, first of all, we have to know the meaning of business transactions. The Business Transactions means those transactions which can be measurable in monetary values and these are of two types i.e. Cash Business Transaction and Credit Business Transactions. So, We can record these all transactions in the book of accounts in two ways one is a cash basis system and another is an accrual basis system. In the cash system, we will record the transaction when the cash is actually paid or received for expenses and income respectively but in the accrual system, we will record the transaction when expense and income actually incurred or earned not at the time when cash is received or paid.
Meaning of Cash Basis Accounting: –
In the Cash basis accounting system, we will record only those transactions in which cash is actually paid against the expenses and received against the income. We did not record any transactions related to the payables or receivables in the books of accounts.
In short, only cash transactions are recorded in the books of account.
Example: –
- Cash sale for Rs 5,000/-
- Sold goods to Ram Rs 10,000/- on credit
Solution: –
- This transaction is recorded in the books because it is a cash transaction.
- This transaction is not recorded in the books because it is a credit transaction.
Meaning of Accrual Basis Accounting: –
In the Accrual basis accounting system, we will record transactions when expenses are incurred and they may be paid or not. and when the incomes are earned and it may be received or not. We will record all transactions related to the cash, payables, or receivables in the books of accounts.
In short, both cash and credit transactions are recorded in the books of account.
Example: –
- Cash sale for Rs 5,000/-
- Sold goods to Ram Rs 10,000/- on credit
Solution: –
- Both transactions are recorded in the books of accounts in the accrual basis accounting system.
Chart of Difference between Cash Accounting and Accrual Accounting: –
|
Basis of Difference |
Cash Basis Accounting | Accrual Basis Accounting |
Meaning |
In Cash basic accounting system, we will record only those transactions in which cash is actually paid against the expenses and received against the income | In the Accrual basis accounting system, we will record transactions when expenses are incurred and they may be paid or not. and when the income earned and it may be received or not. |
Object |
To know the actual cash balance of the business | To know the actual profit/loss of the business in a particular accounting period. |
Process of Recording |
Simple | Complex |
Financial Statement |
The financial statement does not show the actual financial position of an entity because total incomes and expenses are not shown in the books of the account. | The financial statement does show the actual financial position of an entity because actual income and expenses are shown for the particular accounting period. |
Recognized |
This system is not recognized by the law. | This is a recognized system of accounting. |
Business Transactions |
The only cash transaction is recorded. | Both Cash and credit transactions are recorded. |
Accuracy |
It is a less accurate system of accounting. | It is more accurate as compared with the cash basis accounting system. |
Level of Business |
It is suitable for only a very small business. | It is suitable for all level business. |
Download the chart: –
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The conclusion of Difference: –
The main difference in both systems is the time of recording the transactions. In the cash basis accounting system, it recorded when cash received and paid and in the accrual basis accounting system it is recorded when the expenses and incomes have occurred.
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