Every new company must select between accrual vs. cash accounting techniques. The timing or period when the transaction is recorded in the accounts is the primary difference between the two accounting procedures. While accrual basis accounting is based on an issued invoice, cash basis accounting is based on when a payment is received. The accounting records will reflect different outcomes using various approaches due to the variations in the recording period.
WHAT IS CASH ACCOUNTING?
Regardless of when a sale or purchase was made, the cash basis of accounting reports revenue when cash is received and expenses when cash is paid. Accounts Receivable and Accounts Payable are not used in this procedure. It is, in essence, a very straightforward type of bookkeeping.
Non-profit organizations, governmental groups, community associations, and small service firms typically employ the cash foundation of accounting. This strategy works well for a company that doesn’t sell on credit and pays its invoices when they come due. Businesses that use the cash basis of accounting view the cash account as the foundation of their ability to evaluate their financial performance.
HOW TO QUALIFY FOR A BASIC ACCOUNTING SCHEME
To apply for the scheme, one must meet the requirements listed below:
- They registered for GST on a voluntary basis;
- They don’t anticipate the taxable supplies’ worth to go over S$1 million in the 12 months following the use of the scheme;
- The applicant has no unfiled GST reports or unpaid tax;
- In the three years prior to the date of your application, they have not:
Been convicted of an offense under the GST Act or the Customs Act or Accepted an offer of composition; been denied access to the Cash Accounting Scheme and;given a fine in accordance with Section 48 of the GST Act.
ADVANTAGES OF CASH BASIS ACCOUNTING
- Simplicity – Cash basis accounting is easy to understand and requires minimal record-keeping.
- Cash Flow Management – This method provides a more accurate view of cash flow because it records transactions when cash is received or paid.
- Tax Benefits – Small businesses may pay less tax with cash-based accounting because they only pay taxes on income they have actually received.
DISADVANTAGES OF CASH BASIS ACCOUNTING
- Incomplete Picture – This method doesn’t give a complete picture of a business’s financial position because it doesn’t consider accounts receivable or accounts payable.
- Revenue Timing – It may be difficult to determine the timing of revenue recognition in cases where payment is received in advance.
- Limited Compliance – Cash-basis accounting is not compliant with Generally Accepted Accounting Principles (GAAP) and may not be suitable for businesses that need to report to investors or lenders.
WHAT IS ACCRUAL ACCOUNTING?
Regardless of when the money is collected or paid, the accrual basis of accounting reports and records revenues and expenses at the point of sale. Using this method, one can keep track of the money they owe the vendor on a credit purchase as well as the money they owe the customer on credit sales by using accounts receivable and accounts payable.
Despite being more complicated than cash basis, an accrual basis provides more accurate and realistic information about the financial position of the company. As it enables professionals to create more illuminating financial statements, the majority of accounting firms in Singapore choose to use the accrual basis.
For more information, refer to Accounting and Bookkeeping Services in Singapore.
ADVANTAGES OF ACCRUAL BASIS ACCOUNTING
- Completeness – Accrual basis accounting gives a more complete picture of a business’s financial position because it includes accounts receivable and accounts payable.
- Revenue Timing – This method more accurately reflects when revenue is earned, regardless of when payment is received.
- GAAP Compliance – Accrual basis accounting is compliant with GAAP and is generally accepted by investors and lenders.
DISADVANTAGES OF ACCRUAL BASIS ACCOUNTING
- Complexity – This method is more complex and requires more record-keeping than cash basis accounting.
- Cash Flow Timing – The timing of cash flow may not be accurately reflected, as revenue is recorded when earned, not necessarily when cash is received.
- Overstated Income – Accrual basis accounting may result in overstated income in periods when revenue is recognized, but payment is not received.
DIFFERENCE BETWEEN CASH AND ACCRUAL ACCOUNTING
Difference between cash and accrual accounting
| Feature | Cash Basis Accounting | Accrual Basis Accounting |
| Basis of Accounting | Cash received and paid | Transactions are recorded when incurred |
| Recognition of Revenue | Recorded when cash is received | Recorded when earned and billed |
| Recognition of Expense | Recorded when cash is paid | Recorded when incurred and billed |
| Matching Principle | Not followed | Followed |
| Timing of Transactions | Real-time accounting | Retroactive accounting |
| Recordkeeping | Simple and straightforward | More complex and requires additional steps |
| Compliance with GAAP | Not fully compliant | Fully compliant |
| Usefulness | Small businesses with few transactions | Larger businesses with more transactions |
WHAT ARE THE SINGAPORE FINANCIAL REPORTING STANDARDS (SFRS)?
The Singapore accounting standards, also known as SFRS, are based on Singapore – IFRS. Every company having a fiscal year that starts on or after January 1, 2003, must follow SFRS.
Financial statements prepared in accordance with SFRS must be on an accrual basis of accounting. Users can learn about future commitments as well as past transactions from reports made utilizing the accrual basis.
WHAT IS HYBRID ACCOUNTING?
Combining cash-basis and accrual-basis accounting techniques is known as hybrid accounting. Businesses that want to combine the benefits of both approaches often use this method.
Revenue and costs are recorded on a cash basis for some accounts and an accrual basis for others in hybrid accounting. For instance, a company may use the cash method to manage inventory or some expenses but use the accrual method for accounts receivable and payments.
Special guidelines that must be followed while using the hybrid model:
- If the applicant uses the cash method to report the income, they must also use the cash method to report the expenses;
- They must use the accrual technique to report expenses if they use the accrual approach to report income.
- If they have inventory, they must record sales and purchases using accrual accounting.
The benefits of hybrid accounting include greater flexibility in managing cash flow, simpler record-keeping for some transactions, and improved accuracy in financial reporting. However, it also requires careful management to ensure that transactions are recorded correctly and consistently.
Reach out to us at Relin Consultants for further assistance.
FAQs
What is the main difference between accrual and cash accounting?
The main difference is the order in which revenue and expenses are recorded. Regardless of when cash is received or paid, income and costs are recorded in accrual accounting at the time they are generated or incurred. Revenue and costs are recorded when cash is received or paid in cash accounting.
Which accounting method is more accurate?
Although both approaches may provide accurate results, accrual accounting, which takes accounts receivable and accounts payable into account, typically gives a more practical picture of a company’s financial health. For cash flow management, cash accounting might be more accurate.
Is accrual accounting required by law?
Generally, accrual accounting is required for businesses that exceed certain revenue thresholds or meet other criteria, such as having investors or lenders who require financial statements that comply with Generally Accepted Accounting Principles (GAAP).
Can a business switch from cash to accrual accounting or vice versa?
Yes, a company can change between the two approaches, but it must be done complying with accounting standards and with careful consideration of any potential effects on financial reporting and tax obligations.
Which accounting method is better for tax purposes?
It depends on the particular business situation. In certain situations, cash accounting may lead to fewer tax payments, although accrual accounting may offer a more accurate picture of a company’s financial performance and better reflect tax obligations.
What are some common examples of businesses that use accrual accounting?
Businesses that sell goods or services on credit, have inventory, or have long-term contracts often use accrual accounting to track revenue and expenses.
What are some common examples of businesses that use cash accounting?
Small businesses, sole proprietorships, and some professional service providers often use cash accounting because it is simpler and requires less record-keeping than accrual accounting.
