Just those money-related transactions are recorded and also recognized in every business. There are two accounting systems based upon which the transactions are recognized. They are known as the cash system of accounting and the accrual system of accounting. Nevertheless, if accounting is not your thing, you need help from accounting services in Singapore.
What is Cash Accounting?
The transaction is recorded when there is an inflow or outflow of cash. Accounting entries are made when the money is received or paid. Contractors, sole traders, and other experts would usually use this technique to recognize their revenue if there is an inflow of cash (Also see How to Do a Cash Flow Analysis?) and report expenditure when cash goes out. Furthermore, Cash Accounting can be without high expertise and knowledge of accounting. A person with little accounting knowledge could also maintain records.
Cash accounting is however not something to be used when filing tax due to the following:
- It does not meet the matching concept.
- Time lags between the transaction occurrence as well as recognition.
- Lack of accuracy.
What is Accrual Accounting?
The transactions are recorded instantly when the revenue and expenditure are incurred, regardless of the timing of the payment or receipt. According to the matching concept, the expenditures of a certain accounting period are matched with its income. The accrual basis of accounting satisfies this standard; that is why it is considered a useful tool for recording invoices and payments accurately.
Most companies would prefer this technique as the system not just reveals the previous transactions relating to income and expenditures but also forecasts the cash invoices and expected expenses to occur in the future. Furthermore, one of the disadvantages of accrual accounting is the business needs to pay tax (Also see Understanding the Role of Taxes in Planning Your Financial) for the revenue which is have not received.
Cash Accounting VS Accrual Accounting
- Cash Accounting is easy as contrasted to Accrual Accounting.
- According to the Companies Acts, Cash Accounting is not a recognized method, while Accrual Accounting is a recognized method.
- The timing of Cash Accounting is based on the actual timing of receipt and payment. In comparison, the transaction is recorded when the income or expenditure happens for the Accrual Accounting.
- It is much more accurate in accrual accounting, yet less in cash accounting.
- Sole proprietors or contractors would prefer Cash Accounting. On the other hand, big businesses would prefer Accrual Accounting.