Cash-basis vs accrual-basis accounting

One-line orientation

Cash-basis accounting records money when it is received or paid. Accrual-basis accounting records revenue when earned and expenses when incurred. The timing difference changes how a firm reads its finances.

Key points

• Cash basis:
  • Records a transaction only when cash is received or paid out.
  • Simple to maintain; aligns naturally with bank statements.
  • Predominantly used for tax purposes and suitable for smaller firms.
  • Does not capture what the firm has earned but not yet collected, or owes but not yet paid.
• Accrual basis:
  • Records revenue when earned and expenses when incurred, regardless of cash timing.
  • Gives a more accurate picture of the firm’s actual financial position at any moment.
  • Used for daily operations and for generating the profit and loss statement.
  • Requires tracking accounts receivable and accounts payable.
• A firm may use both: accrual for management reporting, cash for tax filing — these are not mutually exclusive.

Cash vs accrual: same transaction, different timing

Same transaction, same total — only the timing of recognition differs (accrual tracks A/R + A/P).

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Firms generally run accrual for management reporting and cash for tax filing.

Confusions / comparison

	Cash basis	Accrual basis
Revenue recognized	When cash is received	When work is performed / earned
Expense recognized	When cash is paid	When incurred / obligation arises
Typical use	Tax filing; small firms	Daily operations; P&L statements
Complexity	Low — matches bank activity	Higher — tracks receivables and payables
Financial accuracy	Snapshot of cash on hand	Truer picture of operating performance

Related

→ pp-financial-statements-and-terms: the P&L statement (generated on accrual basis) and balance sheet · pp-financial-ratios: ratios derived from balance-sheet and P&L figures · pp-firm-planning-tools: profit plan uses projected revenues and expenses built on accrual logic.