What is the difference between cash basis accounting and accrual basis accounting?

@liam 

The difference between cash basis accounting and accrual basis accounting lies in how revenue and expenses are recognized and recorded in financial statements.

1. Cash Basis Accounting:

• Revenue Recognition: Revenue is recognized when cash is received from customers or clients.
• Expense Recognition: Expenses are recognized when cash is paid out.
• Timing: Transactions are recorded at the time of cash inflow or outflow.
• Simplicity: It is a simpler method as it does not require complex tracking of accounts receivable and accounts payable.
• Applicability: Mostly used by small businesses or individuals with simple financial operations.
• Limitations: Cash basis accounting does not provide an accurate picture of a company's financial health since it does not consider accounts receivable, accounts payable, or expenses that have not been paid yet.

1. Accrual Basis Accounting:

• Revenue Recognition: Revenue is recognized when it is earned by delivering goods or services, regardless of when cash is received.
• Expense Recognition: Expenses are recognized when they are incurred, regardless of when cash is paid.
• Timing: Transactions are recorded at the time they occur, regardless of when cash is received or paid.
• Completeness: It provides a more comprehensive view of a company's financial performance as it recognizes accounts receivable, accounts payable, and prepaid expenses.
• Applicability: Mostly used by larger businesses or entities with more complex financial operations.
• Compliance: Accrual basis accounting is generally required for financial reporting purposes, such as in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

In summary, cash basis accounting focuses on the flow of cash, while accrual basis accounting focuses on the timing of revenue and expenses. Accrual basis accounting provides a more accurate representation of a company's financial position and performance, but it requires more record-keeping and adjustments compared to cash basis accounting.