Accounting Accruals or Cash Basis

Accruals or Cash Basis

Definition of Accruals:
Transactions are recorded when they are earned, e.g. invoiced or incurred, regardless of when the cash is received or paid.

Local laws often dictate when the accruals basis is required or the cash basis can be used. For example, in the UK limited companies are required to use the accruals basis for year end accounts filed to Companies House and HMRC.

Internal management accounts often prepared for a interim period, such as monthly or quarterly, to access the performance of a business. In this instance a period of account prepared on both an accruals basis and cash basis would demonstrate how actual cashflow compares to sales made.

📌 Key Features:

• Income (sometimes called sales or revenue) is recorded when earned (e.g., when an invoice is issued).

• Expenses, sometimes calls costs, are recorded when incurred (e.g., when goods/services are received).

• Gives a more accurate picture of financial performance.

✅ Pros:

• Matches income and expenses to the period they relate to.

• Required under Generally Accepted Accounting Principles (GAAP) and IFRS.

• Better for decision-making and long-term planning.

❌ Cons:

• More complex.

• May show profit even if there’s little actual cash.

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