Cash and Accrual are two ways that your organization can keep track of its finances. Most organizations function off of a cash basis, but there may be a situation where running your finances on an accrual basis would be beneficial.
So, what’s the difference? Well, operating on a cash basis simply means that you record your income as you receive money, and your expense as you pay money out. While operating on an accrual basis means you’ll record your income and your expenses based on when the event occurs rather than when you actually receive the money or paid the money.
For example, let’s say you have a contractor come out and do work on your building and he gives you an invoice for the work that day. Here’s the breakdown:
If you were operating on a cash basis, you would record the expense as of the date that the money left your bank.
If you were operating on an accrual basis, you would record the expense on the day the contractor gave you the invoice.
Advantages and Disadvantages
Cash Basis — It’s super simple. You record your income as you receive it and expenses as you pay them out.
Accrual Basis — You have a little more flexibility with this option. If you received income that you need to record for a prior month or year, you can do that.
Cash Basis — It may be too simple. You may not be able to report income and expenses for a previous month or year if you needed to.
Accrual Basis — It can complicate things in your accounting.
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