Accrual vs Cash Basis of Accounting

One of the first decisions in accounting is choosing between the accrual basis and the cash basis. Let's understand both.

Cash Basis of Accounting

Under the cash basis, transactions are recorded only when money actually changes hands.

• Sale recorded when cash is received
• Expense recorded when cash is paid
• No receivables or payables in the books

Example: You sell goods on credit in January, payment received in March. The sale is recorded in March (when cash is received).

Accrual Basis of Accounting

Under the accrual basis, transactions are recorded when they occur, regardless of when cash is exchanged.

• Sale recorded when goods are delivered (even if payment is later)
• Expense recorded when service is received (even if payment is later)
• Receivables and payables are tracked

Example: You sell goods on credit in January, payment received in March. The sale is recorded in January (when the transaction happened).

Which Is Better?

For most businesses — especially in commerce education — the accrual basis is preferred because:

• It matches revenues with the expenses that earned them
• It gives a more accurate picture of financial performance
• It is required by accounting standards (GAAP, IFRS)

The cash basis is simpler but less accurate. It's mainly used by very small businesses or for tax purposes in some jurisdictions.

Key Takeaway

Sold ≠ Paid. Just because you sold something doesn't mean you've been paid — and that distinction is at the heart of accrual accounting.