Cash Basis of Accounting

Under the cash basis of accounting, revenues are recorded in the period in which cash is received, not the period in which the goods have been sold or services provided. Similarly, expenses are recorded in the period in which the cash is paid, not the period in which the expenses have been incurred.

Under the cash basis of accounting, the net profit of the business is determined as the difference between cash inflows from revenues and cash outflows from expenses during the reporting period. Bookkeepers who enter transactions into the accounting systems from deposit slips, cheque butts and from the bank statement are using the cash basis of accounting.
 

Accrual Basis of Accounting

Under the accrual basis of accounting, revenues are recorded in the period in which the goods are sold or the period in which the services are provided. This may or may not be the same accounting period in which the cash is received. In other words, under accrual accounting concepts, revenue is recognised in the period in which it is derived, not in the period in which the cash has been received.

Similarly, expenses are recorded in the period in which they are incurred or consumed, rather than in the period in which the cash is paid.

Under the accrual basis of accounting, the net profit of the business is determined as the difference between the amount of revenue derived during the reporting period and the amount of the expenses incurred during the same period.