What Is The Difference Between Accrual Basis and Cash Basis

Scenario

In ABC Academy, student fees are due on the 1st of every month. The finance team creates a fee voucher on the 1st of the month, and students make payments later in the month. Similarly, the institute prepares employee payslips every month, which are recorded as expenses, but payments to employees are made later.

1. Accrual Basis:

   • Student fees are recognized when the voucher is created (on the 1st), even if the student has not yet paid.
   • Employee salaries are recorded when the payslips are generated (on the 1st), even if payment is made later.
   • The financial picture is more accurate because revenues and expenses are matched to when they occur.

2. Cash Basis:

   • Student fees are recognized only when payment is received (e.g., on the 15th).
   • Employee salaries are recognized only when payment is made (e.g., on the 10th).
   • The financial picture may not accurately reflect the business's operations in the same month, since revenue and expenses are recorded based on cash flow, not when they are earned or incurred.

In summary, accrual accounting offers a more accurate financial snapshot, as it records income and expenses when they occur, while cash basis accounting records them only when actual payments happen.