Construction Accounting: Cash Basic Accounting Vs Accrual Accounting

Cash and accrual are different methods of recording financial transactions

Cash basis accounting is a method of accounting in which income and expenses are recognized when cash is receivable or expenses when they are paid. In short, Cash basis accounting only recognizes a transaction when you spend or receive money (when you cash a cheque). In cash accounting, everything’s based on its real-time impact on your cash.

Accrual accounting is a method of accounting where revenues and expenses of an enterprise relating to assets, liabilities, equity, revenue, and expenses must be recorded at the time of occurrence, regardless of when the money is actually received or paid. In short, Accrual Accounting recognizes a transaction when money is earned, but not exchanged (when you send an invoice). Accrual accounting records revenue as it’s earned rather than when it’s received.

The different between Cash Accounting and Accrual Accounting

The different between Cash Accounting and Accrual Accounting

Accrual accounting is superior to cash accounting because accrual accounting information fully reflects a manager's overall impact on future cash flows. As a result, accrual accounting is more effective for administrators than for cash accounting.

In fact, small businesses use the method of cash accounting because it is often easy to understand and simple. This method does not require any special accounting training or skills, as long as the staff can organize numbers in a table and manage a simple spreadsheet.

However, some larger firms with more complex business operations must use a different approach. The vast majority of companies in the world choose accrual accounting because cash basis accounting cannot meet the needs of keeping records, especially in large companies, corporations with large and complex business operations.

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Specifically, businesses with inventories must use accrual accounting methods, recording revenue, and expenses when selling without dependent on revenue or expenditure. This helps the Company understand the actual causes and results of the business activities, the revenue recognized during the business operation period, and the expenses recognized in the same period as the joint venture revenue. concerned.

In Conclusion

The cash method is best if you have a lot of transactions and deal directly with consumers.

The accrual method is best if you deal with large businesses and don’t get paid quickly.

Are you ready to get help, or are you still not sure if you need help to run your construction business? Contact Construction Cost Accounting to have a free 15-minute consultation!

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