The life of an entrepreneur is so busy that he ends up failing to give proper attention to the financial management of his business – one of the most important areas for the good running of any company.
Updated reports are important and crucial for a broad view of the actual situation of the enterprise. Thus, the administrator can analyze it from two perspectives, each with its specifics: the cash basis and the accrual basis.
But you must know how to differentiate them.
Cash basis is the recording of occurrences on their exact dates of consolidation, regardless of when the triggering event occurred. That is, its main characteristic is to take into account the revenues and expenses of its receipt or payment, not considering the moment when they were effectively carried out. In this sense, the method is directed to the treatment of finances and results, either in the financial or accounting sector.
The cash basis is usually the most used by managers to evaluate the financial situation of the company because it is directly linked to cash flow. When one observes only the financial movement, that’s the adopted basis. It is a logical account because it allows an accurate view of what you have at that moment.
What is an accrual basis?
Accrual basis is a month or other period determined for accounting and tax procedures. This way, the records are totalized periodically according to the formal generating facts, without considering their effectiveness. In general, this basis is focused on the equity and accounting areas.
The advantage of this basis is the possibility for the entrepreneur to plan his future investments more easily, since the financial transactions, even those that have not yet been paid, are already considered in its balance and balance sheet.
Another advantage is to assess depreciation, which is only possible on an accrual basis. The Statement of Income for the Year, one of the most important management reports, is drawn up by this basis and, through the report, it is possible to evaluate whether the company made a profit or loss in a certain period of time.
Difference between cash basis and accrual basis
The main difference between cash basis and accrual basis is that the first one consideres the date when the cash actually entered or left the company's cashier. The second one uses the date when the purchase or sale happened.
The two ways have advantages and it is not a matter of choice: each one will serve to give a different view of the business to the manager and if both are used, even better!