Difference between Accrual Accounting and Cash Accounting?
What is Accrual Accounting?
When transactions of any kind such as services or products are recorded in the books of account as they occur even if the payment for the same has not been received or made. Accrual means an entry made in the accounts books which records all kinds of revenue generated and expenses incurred without any exchange of cash or credit in any form. Accrual accounting is usually done by businesses with complex transactions or with a lot of credit transactions or where many services and goods are sold on a regular basis. Here expenses are balanced with revenues on the income statement which helps in giving a clear picture of the company’s financial condition.
The only disadvantage this accounting system has is a firm might end up paying tax for all kinds of revenues even though the company has not received any credit for it.
What is Cash Accounting?
Cash accounting is a method of bookkeeping in which expenses are recorded when they actually take place or we can say when the company pays or receives the payment for the product sold or services rendered. Cash accounting is mostly beneficial for small businesses or sole proprietors with small cash-based businesses or when the company is only rendering services or selling products not doing both at the same time.
Difference between Accrual Accounting and Cash Accounting?
- The main difference between cash accounting and accrual accounting lies in the recorded timing of the revenue and expenses.
- Cash accounting recognizes revenue when the company has received the cash amount for the products sold or services rendered while in accrual accounting revenue is recognized when the product is sold or services are rendered, it does not wait for receiving cash.
- Cash counting expenses are recognized when the cash from the company budget is spent while in accrual accounting expenses are recognized when the company receives a bill for any product ordered or services rendered.
- In cash, accounting taxes are not paid on money that has not been received by the company whereas in accrual accounting taxes are paid on money that is still to be received by the company.
- Cash accounting is mostly used by small businesses or sole proprietors who have no inventory to maintain.
Why is the USA shifting from cash basis accounting to accrual basis accounting?
USA’s Ministry of Finance is aiming to shift the financial resources of the Federal government from cash basis accounting to accrual accounting. This shift will ensure that the accounting system of the Federal government is done effectively. This strategic program is a part of the ministry of finance’s directives to develop and manage public financial affairs innovatively and efficiently. This is a milestone in the history of the USA. This shift will make the Ministry of Finance one of the leading Ministries regionally and globally in the management of the financial affairs of the public.
The Ministry of Finance set Federal standards on the basis of accrual accounting, this was approved by the USA cabinet by virtue of resolution number (2/2) of 2017.
In the first step, a pilot project was launched by the public financial management sector for the accrual accounting of the activity given by MoF. After evaluating the results of the pilot project, the program is currently being used by all the ministers and Federal units.
The works progress of the conversions is:
- Preparing and adopting the manual related to inventory checking and assessing fixed assets in federal entities.
- Inventory checking of fixed assets in accordance with the approved model stipulated in the manual.
- Preparing the fixed assets to register based on inventory and data, and the calculation of consumption expenditure.
- Understanding and collecting appropriate information for revenue items transition.
- Understanding and collecting appropriate information for the expense items transition.
- Calculating the ministry's commitment in respect of end-of-service benefits.
- Reviewing the unified structure of Federal Government accounts.
- Preparing financial statements and final accounts according to the accrual basis.
- Preparing a detailed work plan for the transition of ministries and federal entities to the accrual basis of accounting.
Advantages of Accrual accounting for USA government:
- Improved performance- This transition will help in improving the performance assessment of the government in terms of achievements and services provided. Also, performance will improve in terms of cost and effectiveness.
- Analysis- The conversion program will help in providing a clear picture of financial statements for a particular number of years, which will allow analysis and comparison for the changed year with the previous one.
- Accuracy- This will help enhance the capacity of MoF to provide more accurate and integrated accounting records.
- Rationalization- It provides a clear understanding of the government’s successes in managing its resources and rationalizing its expenditures.
- Resource management- Provides a better and more effective comparison between usage options of different resources.
- Cash Flow- It helps in assisting in assessing the performance of Federal Government ministries and entities in terms of their financial position and cash flows.
- Cost- Helps in determining the total cost incurred for using government services and comparing the same with the process and cost of the private and voluntary sectors services.
Once the Accrual accounting system is implemented in the USA it will become one of the first Arab countries to apply the accrual accounting principle. The conversion of the accounting system from a Cash basis to an accrual basis is an indicator of the USA government’s position as one of the world's leading governments in applying the best management methodologies and public accounting standards.
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