Accrual Basis vs. Cash Basis

You may see two representative values included on Balance Sheets and P&L Statements. What does this mean and which value should be used in the BizEquity 7-step process?

Accrual Basis and Cash Basis refer to two different methods of accounting

Accrual Basis - Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

Cash Basis - The cash method is the more commonly used method of accounting in small business. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.

Accrual basis financials are more accurate portrayals of "economic reality" and are generally utilized for valuation purposes (whenever available).

The other consideration is that if you use accrual for one period, it must be used for all periods (likewise if cash basis statements are used). Consistency is the key.