Every business needs a proper accounting service method. This would help the organization to create a proper and understandable financial report. There are mainly 2 types of accounting options, those are cash basis and accrual basis accounting, so it creates a difficulty for the owner to choose the right one for their organization. Try to choose the right one that helps your business to create a proper tax report and financial records for the business.
In this blog, you can learn about the cash basis and accrual basis accounting processes and why these are important.
What is Cash Basis Accounting?
In cash basis accounting, the transaction data is recorded when cash is the method of paying and receiving payment. This process is mainly followed by small businesses or small shops due to its simple process, and it helps in the easy recording of the cash flow process. You can easily get full information about the cash flow in a business. Here, you will not be able to show the bill until it is recorded in the financial data of the business.
Features of the Cash Basis Accounting
Some of the features of the cash basis accounting methods are:
- This method can be easily used by the accounting team to create a proper report.
- You can efficiently control the usage of money in the production process.
- The calculation of profit and loss of the business can be done easily.
- The cash earned in that business can be easily checked with the cash basis accounting method.
- It cannot be used to get exact profit or loss data of a business.
- While collecting the data for the report, it will not collect the depreciation data.
- The method of creating the report using the accounting process is not approved by the companies Act 2013.
What is Accrual Basis Accounting?
Accrual basis accounting is a very difficult method of accounting process. It will collect the transaction data without paying any attention to it. If you sell any product on credit, then it will be recorded in the record after the transaction is made. It is the best accounting option as it helps to have a proper visualization of the financial condition of the business.
Features of Accrual Basis Accounting
Some of the features of accrual accounting methods are:
- You can get the exact profit or loss percentage of a business in a period.
- Help to visualize the business’s financial condition.
- Methods of creation of financial reports and the tax collection report are approved by the Income Tax Department and the Companies Act.
- In this accrual accounting method, depreciation data is also collected in the record.
- It helps to collect all the expense transaction data
- The exact process of calculation is used in this accounting process, which will help you calculate the profit and loss percentage of the business.
- The accrual accounting process is really complicated; to do this, you have to gain more skill, time, and resources.
What is the Difference between Cash Basis and Accrual Basis Accounting Methods
| Features | Cash Basis | Accrual Basis |
| Money Earned | When cash received | When revenue earned |
| Money Spent | Paying in cash | Money is used |
| Exact Financial Record | Not properly exact data | Properly exact data |
| GAAP Rule | No | Yes |
| Understanding Process | Easily understandable | Difficult to understand |
| Use by Businesses | Small business, shop | Large business, Global businesses |
| Tax Report | Cannot be made | Can be prepared |
Before selecting the accounting method, it is important to know the difference between the cash basis and accrual basis accounting methods. By reading this difference, you will get all the ideas to choose a proper accounting method for your business report creation process.
- Money Earned and Spent: On a cash basis accounting, the money received and expenditure is recorded when you earn and spend cash for payment where whereas on an accrual basis accounting, it is recorded the payment is received and spent in any format.
- Exact Report: You cannot get an exact financial use record in the cash basis accounting process, but you can get an exact and proper financial use record in the accrual basis accounting method.
- GAAP(Generally Accepted Accounting Principles) Rules: The cash basis accounting method does not use the GAAP principle to create the financial record, but in the accrual basis accounting method GAAP principle is followed perfectly to create the report.
- Understanding Process: Using a cash basis accounting method is quite simple and easy to understand. Whereas the accrual accounting method is quite difficult and complex to use, as it requires more advanced software.
- Tax Report: As the cash basis does not contain the exact data so you can’t prepare an accurate tax report. But the accrual basis accounting method contains the exact data without any mistakes, so it can be used by the organization to get a perfect tax report.
- Used by Businesses: Cash basis accounting is used by small businesses and shops. Accrual basis accounting is used by large businesses and mainly those who are sell their product globally.
Which Accounting Method Will be Best For your Business and Why?
The use of accounting processes is most common in every business to create bills, financial reports, and tax collection reports. Exact data will be very helpful for the organization to create an exact and attractive financial report for partners, stockholders, and banks to get a loan and trust. From cash vs accrual accounting, the accrual method is the best method as it can exactly collect the data to calculate the exact profit or loss percentage of the business. It follows the GAAP rule to make reports. You can properly visualize your business condition and work for its betterment to enhance the production process.
Conclusion
Now you have all the ideas about the cash basis and accrual accounting method. After knowing about them, it is quite easy for you to choose the right method for your business process. It can be easily used by the employee and can be supported in your business process.