The two fundamental methods of recording transactions. Cash accounting records when money moves. Accrual accounting records when transactions occur — regardless of when cash is received or paid. This choice affects your reported profit, tax liability, and financial statements.
Record revenue when cash is received. Record expenses when cash is paid.
Simple and easy to understand
Shows actual cash position clearly
Suitable for freelancers, small businesses
No tracking of receivables or payables
May not reflect true profitability
Record revenue when earned. Record expenses when incurred — regardless of cash movement.
More accurate picture of profitability
Required by IFRS, Ind AS, GAAP for companies
Tracks receivables and payables
Required for GST-registered businesses in India
More complex, requires accounting knowledge
Scenario: You deliver a ₹1,00,000 consulting project on March 25. The client pays on April 10. Your financial year ends March 31.
| Question | Cash Basis | Accrual Basis |
|---|---|---|
| When is revenue recorded? | April 10 (when cash received) | March 25 (when service delivered) |
| March revenue? | ₹0 | ₹1,00,000 |
| April revenue? | ₹1,00,000 | ₹0 |
| March balance sheet? | No receivable shown | ₹1,00,000 in Accounts Receivable |
| Tax impact (March year-end)? | No tax on this income | Taxable in current year |
| Business Type | Recommended | Why |
|---|---|---|
| Freelancers / Sole Traders | Cash (usually) | Simple, tracks actual cash flow, no complex adjustments |
| Small businesses (below GST threshold) | Cash (acceptable) | Simpler compliance, direct visibility into cash position |
| GST-registered businesses (India) | Accrual (required) | GST law requires accrual-based recognition of supply |
| Companies (Pvt Ltd, LLP) | Accrual (mandatory) | Companies Act & accounting standards mandate accrual basis |
| Businesses seeking loans/investment | Accrual (expected) | Banks and investors require accrual-based financial statements |
| SaaS / Subscription businesses | Accrual (essential) | Revenue recognition over subscription period, not at payment |
Revenue earned but not yet received. Example: Services delivered in March, payment expected in April. Record as Accounts Receivable.
Expense incurred but not yet paid. Example: Electricity used in March, bill arrives in April. Record as Accrued Liability.
Cash received before service is delivered. Example: Annual subscription paid in January — revenue recognized monthly over 12 months.
Cash paid before the expense is consumed. Example: 12-month insurance paid upfront — expense recognized monthly over the year.
Cash basis = record when cash moves. Accrual basis = record when transaction occurs.
Accrual accounting gives a more accurate picture of profitability but is more complex.
Most countries require accrual accounting for registered companies and GST-registered businesses.
The matching principle (expenses matched to the revenue they generate) is the heart of accrual accounting.
Laabam.One supports both methods — switch between cash and accrual views for any report.