Video: Cash vs. Accrual Basis Accounting

In this lesson, Nick Palazzolo, CPA, breaks down the essential differences between cash basis and accrual basis accounting. He elucidates how each method determines when income and expenses are recognized, which is pivotal for understanding a business's financials. Nick emphasizes that cash basis accounting—a commonly used method for tax purposes and by small businesses—recognizes revenue only when cash is received, and expenses only when cash is paid. On the flip side, he explains, the accrual basis method—used in accordance with Generally Accepted Accounting Principles (GAAP) by larger companies—accounts for income when it is earned and expenses when they are incurred, regardless of cash flow. Highlighting practical examples, Nick clarifies how these distinctions can have significant implications for gross income recognition on tax returns, making it a crucial topic for grasping the bigger financial picture.