What is the difference between the cash and accrual methods of accounting?
In simple terms, the main difference is when and how you record your revenue, expenses, assets, and liabilities.
The cash method of accounting records transactions based on when the cash is received or when the cash is paid out – such as when a deposit is made or when a check is written. Cash method is focused more on cash flows and is often easier to understand.
The accrual method of accounting records transactions based on when the income is actually earned and when the expense is actually incurred, regardless of any flow of cash.
For example, if you charge program fees for services rendered in the month of March but don’t receive payment until May, the revenue is still recognized in March.
Certain laws and regulations may require an organization to use accrual accounting. Generally Accepted Accounting Principles (GAAP) also require using accrual accounting.
While cash accounting may be easier to understand, accrual accounting is often more thorough and accurate, which is why it is often recommended for nonprofit organizations.