What are the key differences between accrual accounting and cash accounting, and when should each type be used in GL accounting?

Key Differences Between Accrual Accounting and Cash Accounting

Accrual accounting and cash accounting are two different methods used in financial reporting. The key differences between the two are:

• Timing of Recording Revenue and Expenses: In accrual accounting, revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid out. In cash accounting, revenue and expenses are recorded only when cash actually changes hands.
• Matching Principle: Accrual accounting follows the matching principle, which requires expenses to be matched with the revenues they generate in the same accounting period. Cash accounting does not adhere to this principle.
• Accuracy of Financial Statements: Accrual accounting provides a more accurate view of a company's financial position and performance over a specific period, while cash accounting may not reflect the true financial health of the company as it may not capture all transactions.

When to Use Accrual Accounting vs. Cash Accounting in GL Accounting

Accrual accounting is typically used by larger businesses that maintain a significant amount of inventory, have long-term contracts, or need to accurately track revenue and expenses over time. It provides a more complete picture of a company's financial health and is required for businesses that are publicly traded.

Cash accounting, on the other hand, is simpler and may be more suitable for small businesses or self-employed individuals who have straightforward transactions and do not need to report to external stakeholders. It is easier to implement and understand but may not provide an accurate picture of the company's financial standing.

Ultimately, the choice between accrual accounting and cash accounting in GL accounting depends on the size, complexity, and reporting requirements of the business.