Cash accounting

Cash accounting – IFRS only accepts accounting for financial reporting on an accrual basis, see below. [IAS 1 27] However, tax authorities sometimes allow (smaller) entrepreneurs to prepare Financial Statements for tax filing purposes on a cash basis.

The cash basis is much simpler, but its financial statement results can be very misleading in the short run. Under this easy approach, revenue is recorded when cash is received (no matter when it is earned), and expenses are recognised when paid (no matter when incurred).

So this means that  income will be recorded when the company receives cash and expenses are recorded when they are actually paid out and not when the bill is raised.

Cash accounting Cash accounting Cash accounting Cash accounting Cash accounting

There are two basic type of accounting methodologies – one is cash accounting and the other is accrual accounting.

Example cash accounting

An small example of cash accounting (with the IFRS accrual accounting in brackets) is as follows:

If your company ABC receives an order to supply 10 computers on October 10, but you deliver the goods in November, the sale will be recorded in the month of November only and not in the month of October.

Your firm ABC receives cash of €8,000 for the sale of 10 computers from company XYZ on November 10. The accountant will record the transaction of a sale on November 10 only, and not on October 10 (which it would be recorded based on accrual accounting).

Companies record expenses when they are actually paid out. Let’s understand the concept with the help of an example. If your company hires a contractor on November 1 and a bill is raised on that day, but the actual money was paid out on November 15.

Under cash accounting, November 15 would be the date when the transaction will be recorded and not November 1st (which it would be recorded based on accrual accounting). Cash accounting

This method is usually used by sole proprietors who have small, cash-based business or are involved in providing service to customers.

Accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.

This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period. 

The accrual basis of accounting records income and expenses when they are earned.

This accounting method records receivables as income from the moment the service or goods are delivered, and records payables as expenses from the moment the expense is incurred, regardless of when money is received or paid. The accrual basis of accounting is the best method to represent an entity’s financial position since it does a better job at matching income with expenses (matching principle).

Financial reporting divides the economic life of a business into artificial time periods, such as a year, a quarter or a month.

See more explanations on:

Cash accounting Cash accounting Cash accounting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit

Leave a comment