Accounting–Cash vs. Accrual

Cash accounting is the simplest form of accounting and is typically used by small, sole proprietorship businesses. With cash accounting, all expenses, income, etc… gets recorded whenever the cash (or form of payment) transfers hands.

For businesses with over $5 million in revenue, corporations, and inventory-based businesses, accrual accounting is better to use. Accrual accounting notes the expense/income at the time the transaction occurs. For example, if the company sells a TV for $600 in May, but doesn’t receive the payment till the next month, through accrual accounting, their books will show a $600 revenue for May, even though the payment wasn’t received till June. With cash accounting, the books would have recorded an income of $600 in June, and nothing in May.

Especially when the company is based on inventory, accrual accounting is preferred. If you have a small service-based company, it’s just fine to record the revenue at the time the customer pays for the service. However, if you have 2,000 TVs sitting there, and 1,300 of them sold, but won’t be payed till next month, you want the revenue of those 1,300 TVs to be recorded as that month’s income, not the next’s.

Therefore it depends on the type and size of the business as to which type of accounting to use.