Cash vs. accrual accounting: what is the difference?

Accounting lets a repair shop record, analyze and control its financial transactions. But the same month can look profitable or loss-making depending on how revenue and expenses are recorded. That is why understanding the difference between the cash basis and the accrual basis (called "competência" in Brazil) is essential to reading your business's numbers correctly.

Cash and accrual accounting: how they work

Cash basis

Under the cash basis, revenue is recorded when money comes in and expenses when money goes out. It is a straightforward method that is easy to understand, because it shows the financial situation at that moment.

Main features:

• simplicity, especially for small businesses and the self-employed
• easy cash flow control
• a focus on liquidity: it only counts money that actually came in or went out.

Accrual basis

Under the accrual basis, transactions are recorded when they occur, regardless of when money is received or paid. If the shop did a job in January and the customer will pay in three installments through March, all of the revenue is recognized in January.

Main features:

• it matches revenue with the expenses that generated it, giving a fuller view of performance
• it shows each period's profit or loss more accurately
• it requires more control, especially for companies with many sources of revenue and expense.

The key difference

The difference is the recording date. Under the cash basis, what counts is the date money comes in or goes out. Under the accrual basis, what counts is the date the sale or expense took place, even if payment happens in another month.

Which is right for your shop

Smaller businesses with simple operations often benefit from the cash basis for day-to-day cash flow tracking. Larger businesses with more complex operations tend to use the accrual basis to analyze financial performance more precisely. In practice, many businesses track both: accrual to measure results and cash to make sure money does not run short.

When deciding, consider:

• the size and complexity of the shop
• how much cash flow control you need
• the financial reports you require
• the accounting and tax requirements of your tax regime
• your management style and financial strategy.

Since accounting and tax rules in Brazil depend on how the company is registered, confirm your choice with your accountant.

Get to know Onmotor

Onmotor is a Brazilian repair shop software with management tools, including financial ones. There are several plans to choose the best fit for your shop. Talk to our team to get your questions answered.