Accrual Accounting

What is the difference between cash and accrual basis of accounting?

Under the cash basis, transactions are recognised when cash is received or paid. On the other hand, when accrual basis of accounting is followed, transactions are recognised when they occur, not when cash is received or paid. Let’s look at examples:

Bank raises an invoice for services performed in June but the client does not pay until September:

• In Cash Accounting, the revenue is recognised in September when the cash is received.
• In Accruals Accounting, the revenue and customer receivable are recognised in June when services are performed. The customer receivable balance is replaced by cash received in September.

Professional services firm receives retainer fees in May from one of its clients for services to be performed in July:

• In Cash Accounting, the revenue is recognised in May when the cash is received.
• In Accruals Accounting, the revenue is recognised in July when services are performed. The cash received in advance is shown as a liability until the services are performed in July when the balance of the liability is transferred to revenue.

Delegate fees are paid in advance in May for the conference to be held in August:

• In Cash Accounting, the expense is recognised in May when the cash is paid.
• In Accruals Accounting, the expense is recognised in August when the conference is held. The advance payment in May is a prepayment asset which is transferred to expense in August.

What basis of accounting is used by entities in the private sector?

Accrual accounting measures the financial performance and financial position of an entity by recognising transactions regardless of when cash is exchanged. It provides an accurate measure of an entity's profitability during the financial year, and its assets and liabilities at the end of the financial year. The popular accounting frameworks such as IFRS or US GAAP are based on the assumption of accrual basis of accounting.