Cash vs. Accrual Accounting Cash- hands.

The same idea applies to Trade

Creditors (by adjusting the amounts posted to
based accounting recognizes revenue and
each asset or expense, for example).
expenses ONLY when cash is received or paid.
In our simple example above, your revenue
would be recognized when you receive
For companies that use accrual accounting,
payment from your customer – not when you
their system looks like this: An invoice is
invoice them. Conversely, expenses would be
generated for goods and services sold,
recognized when cash is disbursed – not when
increasing sales and creating an amount due (a
the bill is received.
Trade Debtors). When the customer pay you
another transaction is recorded increasing your
cash balance and reducing their receivable to
Businesses that start out using a cheque book-
zero. The same idea works when recording
centric method of recording cash are basically
expenses: a bill is received and recorded by
using a cash-based system. For companies that
tracking what expense was incurred and
use accrual accounting, their system looks like
creating an Trade Creditors record. When you
this: An invoice is generated for goods and
pay your vendor another transaction is
services sold, increasing sales and creating an
recorded, a cheque, which reduces cash and
amount due (an accounts receivable). When the
reduces your payable to the vendor.
customer pays you another transaction is
recorded increasing your cash balance and
reducing their receivable to zero. The same idea
In Account Edge terms, the scenario above
works when recording expenses: an bill is
would look like this: An invoice is generated for
received and recorded by tracking what
goods and services sold, crediting Sales and
expense was incurred and creating an accounts
debiting Trade Debtors. When the customer
payable record. When you pay your supplier
pays you another transaction is recorded
another transaction is recorded, a cheque,
increasing your cash balance and reducing their
which reduces cash and reduces your payable
receivable to zero. The same idea works when
to the supplier.
recording expenses: A bill is received and
recorded by tracking what expense was
incurred and creating a Trade Creditors record.
In the end, your accountant will make the
When you pay your vendor, another transaction
necessary adjustments in order to prepare and
is recorded – a cheque – which reduces cash
file your tax returns. They will take your hybrid
and reduces your payable.
system and adjust it to reflect cash-based or
accrual-based numbers. What that means is
that they adjust your ‘accrued’ balances back to
zero as if the transactions never happened. If
you have an Trade Debtors balance reflecting
£2,500 in sales you’ve not been paid for, your
accountant will make an adjustment to reduce
Trade Debtors by £2,500 and reduce Sales by
the same amount, as if it never happened. In
the world of cash-based accounting, technically,
those sales aren’t recorded until cash changes