Financial Accounting – Accrual Method v/s Cash Method

Friends in our today’s article we will try to understand what is financial accounting. Well, many people try to undergo financial accounting coaching classes in Ahmedabad or may be a tally course or such other courses/training for their career enhancement. So what we do in such accounting courses/tally courses / quickbooks courses is quite deeper. But within this given space let us understand financial accounting.

So what is financial accounting? It is a specialized branch of accounting which deals with all of the company’s financial transactions. It is a process of recording, summarizing and reporting the myriad of transactions resulting from business activities for a particular time interval.

Now let us understand what various accounting training institutes, tally training institutes and software vendors like tally, quickbooks confuse us with two important terms i.e. Accrual v/s Cash. What is this? It is simply nothing but a difference of timing of recognition of revenue and expenditure. Financial accounting may be performed using either the accrual method, cash method or a combination of the two.

During the course of accounting/book keeping, accrual accounting method ensures recording transactions when the transactions have occurred/incurred and the revenue is recognizable.

Cash accounting entails recording transactions only when the cash is exchanged. Revenue is only recognized when the payment is received and expenses are only recorded when we make the actual payment. Looks simple, Right?

Both methods are used everywhere. Accrual accounting is more prevalent because most of the professional accountants generally adopt accrual method since they have generally undergone accounting courses/tally courses and they stress more on accrual accounting. Cash method is more prevalent in small businesses.

Now let us understand with an example.

We will write an accounting entry in the books of Amit Trading Corporation.

Amit Trading Corporation purchases goods from Pawan Dealers Pvt. Ltd. worth Rs. 1,05,000/- and paid Rs. 5,000/- as advance rest is payable when the goods are delivered.

In this case Amit Trading Corporation is a buyer

Now we will be able to understand the difference between accrual method and cash method of accounting.

This is just very basic things. In various tally courses/training or  accounting courses at our institute we make complex concepts very straightforward, use cases to work upon them. We are one of the top accounting institute in ahmedabad.

Feel free to contact us any time. Your feedback is most welcome.