Understanding the Differences: Cash System vs. Accrual System of Accounting

🔑The cash system records income and expenses when they are received or paid, while the accrual system records them when they are billed or earned.

💡The accrual system gives a more complete picture of a business's financial health, but it is more complex to manage compared to the cash system.

📆The accrual system allows businesses to see into the future by tracking outstanding invoices and bills, providing better cash flow management.

🧩Big businesses are generally required to use the accrual system, while smaller businesses can choose the system that works best for them.

💰Both systems have pros and cons, so it's important to consider factors such as income flow, expenses, and cash reserves before deciding which system to use.

Which system is recommended for small businesses?

—Small businesses can choose either the cash system or accrual system based on their specific needs and preferences.

Do I need to switch to the accrual system if my business grows?

—Not necessarily. The decision to switch to the accrual system should be based on factors such as business size, industry, and accounting requirements.

Can I switch back and forth between the cash system and accrual system?

—Yes, many accounting software, such as QuickBooks, allow businesses to easily switch between the two systems.

Does the cash system provide a less accurate view of a business's financial health?

—The cash system may provide a less detailed view, but it still reflects the actual cash flow of a business.

What are the main challenges of using the accrual system?

—The main challenges of using the accrual system are its complexity and the need for ongoing tracking of outstanding invoices and bills.

00:00This video explores the differences between the cash system and accrual system of accounting and clears up common questions about which system to use.

01:51The accrual system records income and expenses when they are billed or earned, providing a more complete picture of a business's financial health.

03:45The cash system records income and expenses when they are received or paid, making it simpler to manage but may not reflect the future cash flow accurately.

05:55Big businesses are often required to use the accrual system, while smaller businesses can choose the system that works best for them.

07:25Consider factors such as income flow, expenses, and cash reserves when deciding whether to use the cash system or accrual system.