Cash Accounting vs Accrual Accounting: which one to choose?

Starting and running a business involves a wide range of decisions. One of the most crucial is how to track the progress of your operations: should you choose cash-based or accrual-based accounting? 

Let’s clarify something right away: if accounting were compared to a vital organ, it would undoubtedly be the heart. Why? Because just as the heart pumps blood to sustain the entire body, accounting ensures the flow of financial resources, keeping your business healthy and thriving. 

Imagine for a moment a body without a functioning heart—everything stops. That’s exactly what happens to a business without solid accounting management: financial flows freeze, and the entire operation grinds to a halt. 

Accounting isn’t just about crunching numbers; it supports every aspect of your business—payroll, investments, cost management, and more. In short, it’s the engine that keeps your business running. 

In summary, accounting is to a business what the heart is to the body: essential. Although the goal is the same – to track financial flows – each method does so in its own way. 

Two types of accounting: each heart its own rhythm 

Now that we've established that accounting is the heart of your business, it's time to explore the two main rhythms it can beat to: cash accounting and accrual accounting. 

Each of these methods tracks financial flows in its own way, much like the heart adjusts its rhythm based on the effort exerted. The choice between the two depends on the size of your business, your goals, and, of course, your business model.

In the rest of this article, we will explore the key differences between these two approaches to help you choose the ideal rhythm for your business. 

Cash accounting

Cash accounting is the simplest and most straightforward method. With this approach, transactions are recorded only when money is actually received or spent. This means that income is recorded when payments are received, and expenses are only recognized when they are paid. In other words, this method focuses solely on actual cash movements, without considering future obligations or unpaid receivables. 

Accrual accounting

On the other hand, accrual accounting takes a more complex approach by recording transactions as they occur, regardless of when money is actually exchanged. Thus, revenues are recognized as soon as they are earned, even if they haven’t been received yet, and expenses are recorded as soon as they are incurred, even if they haven’t been paid. This method offers a much more accurate view of the company's current financial performance, taking into account obligations and receivables, rather than just focusing on cash flow alone. 

Les contrastes essentiels

To summarize, the main difference between accrual accounting and cash accounting lies in when transactions are recorded: Cash accounting records transactions when money is actually exchanged (payment or deposit), while accrual accounting records them as soon as they occur, regardless of when the payment is made. 

Cash accounting	Accrual accounting
Records banking transactions at the time of collection or payment.	Records all business activities at the date they occur.
The advantage of being simple and flexible, especially for taking advantage of tax benefits.	Requires more rigor and offers less flexibility when it comes to tax benefits.
Require more work to convert to accrual accounting.	Easily converts to cash accounting.
Allows you to know the total of financial transactions received or paid during a period.	Provides a better view of the overall status of operations by including accounts receivable and accounts payable.
Allows you to know the company's immediate cash position.	Allows you to know the profitability of a company for a given period of operation, such as a year, for example.
Accounts receivable and accounts payable are not recorded; they will be when the payment or receipt occurs.	Accounts receivable and payable are recorded according to the date of the document. All operational transactions are included in the accounting.
Does not allow you to know the real situation of the company or its financial health.	Allows you to know the real situation of the company and have an accurate picture of its financial health.
Does not allow you to know the total of uncollected sales and their impact on liquidity in the short or medium term, as well as the company's situation.	All sales and purchases are accumulated, regardless of whether they are received or paid.
More difficult to track accounts receivable and accounts payable.	Easy to track and manage accounts receivable.

Impact on business management

Cash accounting and accrual accounting have distinct impacts on business management. Cash accounting, which records transactions only when cash is received or paid, provides a simple and immediate view of cash flow, ideal for small businesses. In contrast, accrual accounting, which links revenues and expenses to the period in which they are incurred, allows for a more precise analysis of financial performance and facilitates strategic decision-making. 

Cash accounting	Accrual accounting
Difficult to budget based on past years, as the available data only reflects the ability to pay, providing a limited view of potential objectives.	A monthly income statement provides a detailed view of the previous year, greatly facilitating the creation of an accurate budget and the clear definition of future directions.
A cash flow budget based on cash accounting provides a clear view of the company's liquidity but does not reflect its actual profitability.	The operations budget allows for anticipating expected results while planning liquidity and financing needs, ensuring proactive and balanced management.
Ignoring its financial situation generates significant stress for the manager, making strategic decision-making more complex and uncertain.	A manager who masters their financial situation is better prepared to handle unforeseen events, as they know that variances are temporary and have the tools to address them effectively.
Cash accounting, while useful for tax management and tax refunds, does not allow for real-time management based on reliable operational data. For a good manager, it remains insufficient for making informed strategic decisions.	Real-time management of the company is made possible through the available information, which can be leveraged through various tools that facilitate decision-making. Indicators now play a key role, offering a quick and effective way to monitor performance and take action accordingly.

Changing your accounting method

Switching from cash accounting to accrual accounting involves a change in how you record your financial transactions. To make this transition, start by adjusting your accounting records to include all unsettled transactions, such as accounts receivable and accounts payable. This means tracking and recording receivables and payables that have not yet been settled but have already been incurred. 

It is also essential to implement tracking tools to manage these adjustments and ensure consistent financial management. While this transition may require a bit more time and effort initially, it provides a more accurate view of your company's profitability. 

Adopting accrual accounting also simplifies the management of your tax and financial obligations, allowing you to better anticipate your cash flows and have a more realistic view of your company's financial health. 

Why Aleop recommends accrual accounting

Regardless of the accounting method chosen, Aleop remains a simple and user-friendly tool. However, our preference clearly leans toward accrual accounting, and here are the 5 reasons why, according to our team, it is the most effective method for optimal management. Because the numbers should guide you, not the other way around. 

1. Transactions are recorded progressively, providing an accurate overview.
2. Tracking customers and suppliers becomes easier with detailed account statements. 
3. Aleop automatically generates accounting entries when paying suppliers, thus simplifying the process.
4. After making payments in the software, a list of payments to be made in your bank account is generated. Once the payments are completed, the accounting is automatically updated.
5. The financial year-end becomes a breeze! Your accountant will thank you, and you'll congratulate yourself: the bulk of the work is already done! 

Maximize your company's financial performance with Aleop 

By adopting accrual accounting with Aleop, you optimize your financial management by gaining a more precise and comprehensive view of your company's health. Thanks to intuitive and automated tools, you improve efficiency, reduce the risk of errors, and simplify the management of your tax obligations. With Aleop, you're prepared to anticipate your financial needs, make informed decisions, and navigate smoothly, even during the most stressful periods. Accrual accounting has never been this simple and accessible.

*Please note that accrual accounting must be used by any business not related to the agricultural sector, fishing, or independent commission-based sales.