Can you explain the difference between cash basis accounting and accrual basis accounting?

Explaining the Difference Between Cash Basis Accounting and Accrual Basis Accounting

During an interview for a position in the Accounts category, you may be asked to differentiate between cash basis accounting and accrual basis accounting.

Cash Basis Accounting: In cash basis accounting, revenue and expenses are recorded when cash is physically received or paid out. This method provides a real-time view of the company's cash flow and is simpler to use. However, it may not accurately represent the overall financial health of the business since it does not consider outstanding invoices or bills.

Accrual Basis Accounting: Accrual basis accounting, on the other hand, records revenue and expenses when they are incurred, regardless of when the cash is actually exchanged. This method provides a more accurate long-term view of the company's financial position, including outstanding invoices and bills. It follows the matching principle, aligning revenue with the expenses incurred to generate that revenue.

Employers in the Accounts category are looking for candidates who understand the differences between these two methods of accounting and can apply them effectively in financial decision-making.