Accrual Accounting
Accrual accounting is a method of accounting where revenue and expenses are recorded when they are earned or incurred, respectively, regardless of whether the money has been received or paid. This means that revenue is recorded when the service or product is delivered, and expenses are recorded when the product or service is received.
For example, let’s say you’re a small business owner who delivers goods to a customer on credit. Under accrual accounting, you would record the revenue when the goods are delivered, even if the customer hasn’t paid you yet. Similarly, if you purchase goods on credit, you would record the expense when you receive the goods, even if you haven’t paid for them yet.
Accrual accounting provides a more accurate picture of a company’s financial position, as it accounts for revenue and expenses that have been incurred but not yet paid or received. It also helps businesses track accounts receivable and accounts payable.
Cash Accounting
Cash accounting is a method of accounting where revenue and expenses are recorded when the money is received or paid, respectively. This means that revenue is recorded when the money is received, and expenses are recorded when the money is paid.
For example, let’s say you’re a small business owner who sells goods to a customer for cash. Under cash accounting, you would record the revenue when the customer pays you. Similarly, if you purchase goods and pay for them immediately, you would record the expense when you pay for them.
Cash accounting provides a simpler method of accounting and is easier to manage for small businesses with simple transactions.
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