Accrual-basis accounting vs. cash-basis accounting
| Aspect | Accrual basis | Cash basis |
|---|---|---|
| Revenue recorded | When earned | When cash is received |
| Expense recorded | When incurred | When cash is paid |
| Usefulness | Better view of performance | Simpler, but less informative |
Why accrual accounting matters:
- it matches revenue and expense to the right period
- it is the basis for most formal financial reporting under GAAP
Example:
- If a company receives cash before delivering a service, it records Unearned Revenue first.
- If it receives a supplier invoice before paying cash, it may record Accounts Payable first.