Chartered Accountant Interview Question: Difference Between Accrual and Cash Accounting

Accrual accounting recognizes revenues and expenses when they are earned or incurred, regardless of when the cash transactions occur. On the other hand, cash accounting records transactions only when cash is exchanged.

Examples:

• Accrual Accounting: In a service business, revenue is recognized as soon as the service is performed, even if the customer has not yet paid. Expenses, such as salaries, are recorded when they are earned, not when they are paid.
• Cash Accounting: A small retail store may choose cash accounting as it is simpler and more straightforward. Revenue is recorded when the cash is received, and expenses are recorded when the cash is paid out.

Both methods have their own advantages and disadvantages, and the choice between them depends on the nature and size of the business.