Accrual accounting is a method that allows eCommerce businesses to record revenue even before receiving payment for goods sold. The other accounting method is the opposite of accrual accounting: Cash accounting. In cash accounting, revenue is recorded when payments are completed.
Let’s understand the difference between both accounting methods with an example.
Let’s say you sold products worth $5,000 on Oct. 30 and sent the bill to the client on the very same day. On Nov. 25, you get the payment in cash. Here’s how the accounting entry will be done according to the cash and the accrual method.
Cash Method In the cash accounting method, $5,000 revenue will be recorded on Nov. 25 because this was when you got the cash payment from your client.
Accrual Method In the accrual accounting method, $5,000 revenue will be recorded on Oct. 30 because this was when you sold products to the client and generated the invoice.