What is the difference between cash accounting vs accrual accounting? Use an example for each.

Answer 1

In cash accounting, revenues and expenses are recognized when payment occurs. As a result, there are no accounts receivable or accounts payable.

In accrual accounting, revenues and expenses are recognized only when the product/service is provided - regardless of when payment was received.

Example: A company sells you $10,000 of widgets on May 1, and you pay the invoice on June 1. Under the cash basis, the company recognizes the sale on June 1, when the cash is received. Under the accrual basis, the seller recognizes the sale on May 1, when it issues the invoice.

Journal Entries:

Cash Basis -

June 1. DR Cash 10,000

CR Revenue 10,000

Accrual Basis -

May 1. DR Acct Receivable 10,000

CR. Revenue 10,000

June 1. DR Cash. 10,000

CR. Acct Receivable. 10,000

Hope this helps!