The difference between Cash vs Accrual accounting has to do with when the business will record the transactions.
Under Cash accounting, a transaction is recorded when it actually occurs. For example, a business will record income or expense when cash changes hands. It is ideal for small businesses as it is straight forward and easy to use.
Another benefit of cash-based accounting is taxes. Under this method a business does not have to pay any taxes on money that has not changed hands. This is an important distinction between the two methods as small business can run in to cash flow problems if they have pay taxes before receiving cash.
Accrual accounting, on the other hand, income is recorded when a sale occurs regardless of whether the business has received the cash or not. This situation can occur when, for example, a sale has been made and the invoice has not been paid as yet. Accrual accounting requires this sale to be recorded as revenue even though cash has not been exchanged. The same applies to the expenses, the business will record an expense when it occurs even if the business has not paid for it yet.
Under accrual accounting, a business will have to pay taxes even on income for which it has not yet received cash. This is due to the fact that accrual accounting focuses on the transaction event and more accurately captures the state of finances of a business.
IFRS (International Financial Reporting Standards) and ASPE (Accounting Standards for Private Enterprises) require financial reports to be prepared using the accrual accounting method.
Accrual method shows a more complete picture of a business’s financial health as it shows what has been earned in a period and what is actually owed.