Accrual accounting and cash accounting, the differences

Every business must comply with several obligations, particularly the obligation to maintain regular accounting. To do this, two methods are feasible: cash accounting and accrual accounting. We will compare these two solutions to understand which one would be more interesting for your business.

Cash Accounting

Cash accounting consists of recording in its accounts only the revenues and expenses that have already been received or paid out. Thus, debts such as receivables are not taken into account and only appear in this accounting for merchants who must record these transactions at the close of the fiscal year. Ultimately, all movements that directly affect the company's assets are recorded at the time they generate a financial flow.

The main advantage of cash accounting is that it is a very simplified form of accounting management that lies in the fact that debts and receivables are not recorded. The business therefore only needs to translate the transactions that generated a financial flow. Moreover, this accounting saves considerable time because of the few accounting entries it requires.

In some cases, this method still presents a few drawbacks. Indeed, tracking unpaid invoices requires strong organization to avoid getting lost. Furthermore, monthly VAT returns calculated from the debits require extra-accounting calculations. Finally, it does not allow tracking third-party accounts such as those of suppliers or customers, for instance.

Accrual Accounting

Accrual accounting, also called "accounts receivable and payable accounting" or "debit accounting" is another method that allows the recording of accounting operations, mandatory for certain structures. It consists, unlike cash accounting, to record all the revenues and expenses of the business even if they have not resulted in financial flows (in payments). Thus, customer and supplier invoices are accounted for.

Its primary advantage is obviously that the financial information presented is of better quality. It offers a more accurate picture of the reality of the result and assets of the business. Moreover, with this method, it is easier to track debt recovery.

However, accrual accounting is not without its drawbacks. In fact, this method is quite cumbersome to implement. To successfully carry it out, it is necessary to gather all the company's invoices so that they can be correctly recorded in the accounts. This task leads to more accounting entries, which consequently entails a greater cost for the business.

Cash or Accrual Accounting?

It is not necessary to choose between cash accounting and accrual accounting. In reality, businesses do not really have a choice of the method they wish to use as it depends on their tax regime. However, they can formulate options that may allow them to apply certain rules from one of the methods.

By default, it is accrual accounting that applies to businesses. Indeed, it is the mandatory model for businesses taxed as BIC (industrial and commercial profits) or under corporate tax (IS) under the normal real regime. For those under the simplified real regime, it is possible to opt for cash accounting provided that debts and receivables are recorded at the close. Conversely, businesses classified as BNC (non-commercial profits) maintain cash accounting, but may also, upon request, maintain accrual accounting.

Ultimately, whether your business uses accrual accounting or cash accounting, it must adhere to strict principles and obligations. Qotid advises you to be supported by an accountant, who will ensure reliable management.

What are the effects of these methods on reporting?

From a management control perspective, reporting based solely on your cash flows will not give you a clear view of the profitability and performance of your business. It is therefore strongly advised against making your reports this way, unless the processes in place in your business do not entail possible payment delays between receipts and disbursements. For example, if you pay your suppliers only by direct debit and, similarly, your customers are debited during a purchase, there will be no payment delays to notice. If that is not the case, the risk with this accounting method is ending up with a completely distorted and unrepresentative picture of your profitability.

Making your reports based on accrual accounting will give you a precise view of your profitability and business performance. It is the only way for a business owner to truly know their margins and break-even point. This process obviously requires method. All invoices must be recorded in accounting even if they have not yet been presented to the bank. It is also possible to provision for invoices not received from suppliers. The idea is to have a precise monthly idea of what you have consumed (purchases) and what you have invoiced (sales).

In summary:

Regular accounting is a requirement for every business. There are two methods for maintaining this accounting: cash accounting and accrual accounting.

Cash accounting involves recording only the revenues and expenses that have already been received or paid out, while accrual accounting records all the revenues and expenses of the business, even if they have not led to financial flows. Cash accounting is easier to manage but does not allow for tracking third-party accounts and requires strong organization for tracking unpaid invoices. Accrual accounting offers a more accurate picture of the result and assets of the business but is more burdensome to implement and incurs a higher cost for the business.

The choice between the two methods depends on the business's tax regime. Regarding reporting, it is strongly advised against relying solely on cash flows, as this can give a distorted picture of the business's profitability. It is preferable to base it on accrual accounting to have a precise view of the profitability and performance of the business.

‍

F.A.Q:

What are the two methods for maintaining regular accounting?

The two methods for maintaining regular accounting are cash accounting and accrual accounting.

Is it necessary to choose between cash accounting and accrual accounting?

It is not necessary to choose between cash accounting and accrual accounting. In reality, businesses do not really have a choice of the method they wish to use as it depends on their tax regime. However, they can formulate options that may allow them to apply certain rules from one of the methods. By default, it is accrual accounting that applies to businesses.

What are the advantages of cash accounting?

The main advantage of cash accounting is that it is a very simplified form of accounting management that lies in the fact that debts and receivables are not recorded. The business therefore only needs to record transactions that generated a financial flow. Moreover, this accounting saves considerable time due to the few accounting entries it requires.

What are the advantages of accrual accounting?

Its primary advantage is obviously that the financial information presented is of better quality. It offers a more accurate picture of the reality of the result and assets of the business. Moreover, with this method, it is easier to track debt recovery.