Cash vs. Accrual Accounting: The Difference
Quick facts
- Definition
- Cash accounting recognizes revenue and expenses when money comes in or goes out; accrual, when the event that generated them happens.
- Example
- Procedure done in October and paid in installments through March: accrual recognizes it in October; cash, month by month.
- When to use
- Cash to control liquidity; accrual to measure the real result of the period.
- Relevance in orofacial harmonization (HOF)
- Card installments and session packages make the two methods show very different numbers.
Cash accounting and accrual accounting are two ways of recording revenue and expenses. The difference is in when the event is counted: under cash accounting, when money comes in or goes out of the account; under accrual, when the service is delivered or the expense is incurred, regardless of when payment happens.
What is the difference in practice?
A hypothetical example helps. A R$ 3,000.00 procedure is performed in October and the patient pays in 6 card installments, which the clinic receives from November to April.
| Month | Accrual | Cash |
|---|---|---|
| October | R$ 3,000.00 of revenue (service delivered) | R$ 0.00 (nothing received) |
| November to April | R$ 0.00 | R$ 500.00 per month (installments, before fees) |
Both records describe the same sale, only at different moments. Accrual shows that October was a good month of care; cash shows that the money arrives later.
This changes how the business is read. A clinic can have an excellent result on an accrual basis and at the same time lack cash to pay the month's bills, especially when many sales are in installments. Receivables prepayment and the card terminal fee enter this calculation and reduce the net amount.
When is each one more useful?
Cash accounting answers the question "do I have the money to pay what is due?" It is the daily management tool, tied to cash flow. Accrual answers "is the business producing results?" It is the basis of the income statement (DRE), which compares revenue and costs of the same period and makes it possible to calculate the contribution margin per procedure.
Managing by cash alone can give the false impression that a weak month of inflows means little work, or that a month with many old installments collected was good. Managing by accrual alone can hide a liquidity problem.
How does this show up in packages and unpaid accounts?
Session packages and scheduled follow-ups create the typical accrual problem: the patient pays today for services that will be delivered in the coming months. In accrual terms, revenue should only be recognized when the session is done; the amount received earlier is, on the balance sheet, an obligation to the patient.
Default on payments affects the two methods differently: in cash, it is money that did not come in; in accrual, it is revenue already recognized that may not be collected.
Also called: cash and accrual, cash basis vs. accrual basis.
Frequently asked questions
Which method should the clinic use?
It depends on the tax classification and on management needs. For daily control, cash shows the money available; for assessing performance, accrual is more faithful. The tax choice should be defined with the accountant.