On the-hopefully rare-occasion when payment is not received, accrual accounting allows for bad debts. It shows revenue when the company delivers products or services to a customer, under the expectation payment will be received. For instance, under an accrual accounting approach, a business records its payroll expense as employees work, rather than when it issues paychecks.Īccrual accounting can provide a more encompassing picture of a company’s profitability. In contrast, accrual accounting tends to present a “smoother” picture of revenue and expenses because it records them as they’re earned or incurred. A company’s performance can appear to fluctuate more under cash basis accounting than it does under accrual accounting, as the timing of the income and expenses recorded depend, at least in part, on when companies and their customers issue invoices or pay their bills. Also, because cash basis accounting doesn’t match expenses with the revenue related to them, it can present a misleading picture of a company’s performance. For instance, it wouldn’t show upcoming lease payments or revenue expected from orders that are booked but haven’t shipped. However, because cash basis accounting doesn’t show incoming payments or commitments coming due, it can provide an incomplete picture of a company’s health. It’s also relatively straightforward to learn. Along with impacting how a business maintains its records, the different approaches provide varying perspectives on the company’s financial performance.Īs its name suggests, cash basis accounting tends to provide a clear picture of a company’s cash reserves. When deciding how to report income and expenses, business owners may choose from two accounting methods: cash basis accounting and accrual accounting. East, Nordics and Other Regions (opens in new tab)
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