2 Cash versus accruals accounting
‘Remember that credit is money.’
Benjamin Franklin, American statesman, diplomat, writer, scientist and inventor.
In a nutshell
‘Cash accounting’ simply records inflows and outflows of cash, into and out of a business. Income is recognised only when cash is ‘received’ and expenses are recognised only when cash is ‘paid’. This risks understating or overstating a business’s net worth.
Instead, the vast majority of businesses and all companies prepare their accounts on what is known as the ‘accruals’ or ‘matching’ basis.
‘Accruals accounting’ acknowledges the timing differences inherent in and arising from business transactions. Income and expenses should be ‘matched’ to the correct period. Financial transactions ...