Distinction
The fundamental difference lies in the timing of recognizing Revenue and Expenses. Accrual Accounting focuses on when economic events occur (revenue earned, expenses incurred), while Cash-Basis Accounting focuses on when cash changes hands.
Accrual Accounting
- Revenues recognized when earned (goods/services delivered).
- Expenses recognized when incurred (matched to the revenue they helped generate).
- Provides a picture of operational performance and profitability for a period.
- Standard under US GAAP for most companies.
Cash-Basis Accounting
- Revenues recognized when cash is received.
- Expenses recognized when cash is paid.
- Simpler, directly tracks cash movements.
Implication
Accrual accounting gives a better sense of underlying profitability but may not reflect the actual cash available to the company at a specific moment. Cash-basis shows the cash position but can misrepresent periodic profitability if there are timing differences in payments.
See also: Accrual Accounting Principles, Income Statement, Cash Flow Statement