Why Accrual Accounting is Better than Cash Accounting

cash accounting

Accrual accounting and cash accounting are two main popular ways to prepare financial statements. Two of these accounting has similarities but also has large differences. Accrual accounting is well known with its great accuracy.

Why accrual accounting has become more used than cash accounting is just because this type of accounting is much fair and accurate in recognizing revenues and expenses although you see no money collected. If a purchasing deal is done in your business, cash or on account, there will be expense recorded. By this happened, even you see no accurate statement of your current company’s cash, but that will give you an accurate representation for your business profit.

Meanwhile cash accounting is the opposite of accrual accounting. When revenue and expenses are paid or received, this method will be recognizing this as profit. If your business is purchasing an item of product to your client, for example, you just see no profit come to your company’s account until it is paid in cash so it will not be recorded as expense.

With that recording method, for many business owners, cash accounting will just give many problems if the preparation of financial statements is coming especially for a company which has more outstanding payable than what it receives. For example if a company collected its majority of its receivable and not paying the company’s outstanding bills, this cash accounting seems to report that the company has got more profit than what it really has. And then in the next period when that company pays off its expense account finally, this cash accounting seems to report that the company is having a huge loss. This will be seen clearly especially if the company does not collect enough cash to make what the company has paid. This way of report will make the business owners think that they have no balancing payment when seeing this cash accounting.

Thus cash accounting can distort a profit and loss statement beside it also totally makes investors and stakeholders become easily confused. Hopefully by reading this article you can understand about the main types of accrual accounting and cash accounting methods.

From the explanation above we can see clearly why accrual accounting is proven more accurately to report compared to cash accounting and makes business managers get better picture if their companies got profit or not.

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