Accrual vs Cash Basis
Definition
The two main accounting methods. Accrual basis records revenue when earned and expenses when incurred; cash basis records them only when money moves. Accrual gives a truer picture of performance, while cash basis is simpler.
Common questions
Which method should a small business use?
Very small or cash-only businesses often use cash basis for simplicity, but accrual gives a more accurate view and may be required above certain sizes or for external reporting.
Related Terms in Accounting Principles
Conservatism Principle
The accounting convention of recognising expenses and liabilities as soon as they are probable, but recognising revenues and gains only when reasonably certain. It avoids overstating the financial position.
Consistency Principle
The convention that a business applies the same accounting methods from period to period, so results are comparable over time. Changes are allowed but must be disclosed and justified.
Historical Cost Principle
The convention that assets are recorded at their original purchase cost rather than current market value. It gives a verifiable, objective basis for the accounts, though it can understate the current worth of long-held assets.
Revenue Recognition Principle
The rule that revenue is recorded when it is earned and realisable — when control of goods or services passes to the customer — regardless of when payment is received. Modern standards set a structured model for applying it.
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