Accrual vs cash accounting

When each records a transaction

Under cash accounting, a sale counts when the money is received and an expense counts when it is paid. Under accrual accounting, a sale counts when it is earned — when the supply is made — and an expense counts when it is incurred, regardless of when cash changes hands.

So a credit sale shows up immediately under accrual but only on payment under cash accounting.

Why the choice changes the picture

Cash accounting is simple and mirrors the bank balance, but it can hide the fact that a business has earned a lot it has not yet collected — or owes a lot it has not yet paid. Accrual accounting shows the fuller economic picture, including receivables and payables, at the cost of more record-keeping.

For a business that sells on credit, accrual is usually the truer view of how it is doing, even if cash accounting feels more immediate.

How Lekha shows what is earned and owed

Lekha tracks receivables and payables — what you are owed and what you owe — not just what has moved through the bank, so the earned-and-incurred picture is visible alongside the cash.

Lekha records what your documents say and tracks the money on both sides — what you owe and what you are owed. It records and tracks; it does not replace your accountant.

Questions

What is the difference between accrual and cash accounting?

Cash accounting records a transaction when money moves; accrual records it when the sale is earned or the expense is incurred, regardless of when cash changes hands.

Which shows receivables and payables?

Accrual accounting, because it counts sales when earned and expenses when incurred, so amounts owed and owing appear before the cash moves.

Which method suits a business selling on credit?

Accrual usually gives the truer picture for credit sales, since it shows what has been earned but not yet collected. Confirm the right basis with your accountant.

Keep reading

• Receivables vs payables
• Working capital basics
• See how Lekha works
• All Lekha guides