The experts that offer eCommerce accounting services say that the main difference between cash and accrual accounting is all about the time when the sales and purchases of a company are tracked in the accounts. Cash accounting is all about income and payments only mean the money is changed in hands, but accrual accounting is all about income while it is earned and payments when they are built but not paid actually.
Things to know about cash basis accounting
Under e-commerce bookkeeping, several companies go for cash basis accounting as it is very simple. Firstly the method doesn’t include the accounts payable or receivable. It is quite easy to determine when the transaction happens, that is, when the money comes in the bank or goes out of the bank, and there is no need to keep track of payables or receivables. When it comes to tracking how much cash the company has at any point in time, the cash method is quite beneficial. All the company management needs to do is look at the bank balance and understand how much money is available to them. As the transactions are not tracked, the cash is received or paid, and the business income cannot be taxed.
What is accrual accounting?
The method where people will calculate revenues and payments as and when they happen irrespective of whether the money is earned or not. For instance, a company will keep a track of income when a project is completed instead of when they are getting money. The best part about this method is that the company will get a better long-term picture of the businesses that the cash account will never provide. The downfall of this method is that the company is not aware of the cash, and the business will appear very profitable, but it doesn’t have anything in the bank.
The significant differences between cash basis and accrual accounting
The significant difference between the 2 is the timing of the income and expenses. Some companies use cash basis accounting because the financial statements really reflect the cash position, and it is vital for small business owners. Simplicity is one of the main elements that attract the bookkeeping experts to it. But under this method, a company cannot apply for tax. There are several challenges under this method as cash accounting is not accepted GAAP, so the financial statements are considered and sufficient by several lenders, and they are also prohibited for all publicly traded businesses.
On the flip side, the accrual accounting method is the standard gold method as it will give a company a better accurate representation of the finances of a company. Companies can easily keep track of the credit transaction with accrual accounting as they will be using accounts receivable systems. It will show the entire transaction history of all the customers. The account payable system will also show the transaction history between the supplier and the company. GAAP also accepts the method. Hence one can use this method without a doubt and before choosing anyone method it is important to know the differences.