cash or accrual accounting?

by Fanie Schoeman and Max Michau | March 30, 2022

Sometimes the more “difficult” road leads to the greatest destination…

We oftentimes meet new clients, have sit-down sessions to gain insight into the business and quickly realise that their accounting approach is cash based. Usually this is met with vigorous internal “sighs” and head scratches. Yes, this method is simple and yes, it is quick, BUT is it the most efficient and value adding approach?

On the other side of cash accounting, you have accrual accounting. The more labour intensive of the two approaches, but as a principle, definitely your best option and in this article we’ll explain why a little bit more effort will help you reap the rewards down the line.

Difference between Cash & Accrual

The practice of bookkeeping requires a record trail of income and expenses in a central place, known as the ledger. This is especially important for any business that wishes to claim tax deductions at the end of their financial year.

This raises an important question. When should transactions be recorded within the ledger? Should I record it when the cash is received or on the date invoiced? From here stems the two main types of accounting: cash-based accounting and accrual-based accounting.

Knowing the difference between accounting methods is important in order to determine the best fit for your organisation and its effect on tax.

The ultimate difference between these two accounting types is the timing of when revenue and expenses are recognised within your accounts.

Cash accounting recognises revenue and expenses when money changes hands. This entails the recognition of cash flows exactly when it enters or leaves your company’s bank accounts. The cash basis allows you to know how much cash resources you have at your disposal.

This accounting method is mostly preferred by small businesses due to its simplicity, in the belief that it is easy to maintain. This is rarely the case, especially with those having inventory, debtors, and creditors to manage.

The problem is that cash accounting provides highly inaccurate information regarding the business’s financial position. It could show that the company is profitable just because they have not paid any of their bills. It is very difficult to make management decisions regarding the future as you only have a day-to-day view on your finances.

Accrual accounting, on the other hand, recognizes income and expenses when they are earned or incurred. In accounting terms “incurred” refers to the moment at which a transaction has taken place, or an expense has occurred. A transaction is, therefore, recognized when money is incurred not exchanged.

This method allows for more accurate reporting for a period of time, providing better financial insights. It is easier to make financial decisions with confidence because of all the information you can extract from it and also paints a long-term picture of your company’s financial position.

Take note that the accrual basis still requires careful monitoring of your cash flows. This is primarily due to your bank account not necessarily matching your books. You might appear profitable when looking at the financials, while in reality you do not have the cashflow to meet your short-term financial obligations.

Accrual accounting can thus help you in making better decisions, but without professional assistance, it may also lead to inaccurate reports and a situation where you cannot pay your suppliers.


At waufm we identify a company’s KPI’s (Key Performance Indicators) based on cash flow drivers that are in line with the company’s vision and mission, to measure their performance and help them grow. Using the accrual accounting method allows us to more accurately report on the KPI’s identified and measure it more effectively in relation to previous period data. It also helps us identify trends and patterns to further assist our clients with making informed decisions and effectively plan for the future in terms of cash flow forecasts.

There is a saying “Time is money”, however in this case, a little bit more time spent saves you a lot of money in the long run. At waufm we put in the necessary time to ensure we assist our clients in making the right business decisions to optimise their cashflow position.

We would love to discuss with you how you manage your company’s finances. Connect with us.


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