Understanding Cash and Accrual Accounting
Differences between cash and accrual methods.
The cash method and the accrual method of accounting are the principal ways of tracking income and expenses. The only difference between the two is when transactions are recorded, and you can choose either method in ACS.
Cash-basis accounting records financial events based on cash flows and cash position. You record revenue when you receive cash, and you record expenses only when cash is paid. In cash-basis accounting, revenues and expenses are also called receipts and payments. In this method of accounting, you do not use payables (future payments) or receivables (future receipts).
Accrual-basis accounting records financial events based on when they occur. Under accrual accounting, you record revenue when it is earned and realized, regardless of when the actual payment is received. Similarly, you record expenses at the time goods are received, regardless of when they are actually paid.
Once you determine whether you will use cash or accrual accounting, select the appropriate setting on the GL Interface Tab.
Here's a comparison of cash and accrual accounting:
|
Accounting Method |
Revenue |
Expense |
Advantages/Disadvantages |
|---|---|---|---|
| Cash-basis | Recorded when money is received. | Recorded when money is paid. | Easier to use.Fewer transactions and less time spent.Does not provide a true picture of income and expenses because revenues and expenses are not matched in the period they occur. |
| Accrual-basis | Recorded when earned, even though money is not received. | Recorded when goods or services are received, even though not paid for. | Displays a true picture of income and expenses because revenues and expenses are matched in the period they occur.More transactions and more time spent.Requires understanding of payables and receivables. |
To select an accounting method
- Under Advanced Tools, click the Settings tab.
- Select Accounts Payable in the drop-down list and click Go
.
- Select the G/L Interface tab.
- Under Accounts Payable Mode, select either Accrual or Cash.
- Click OK.