Accrual in the context of Cash accounting

The cash method of accounting, also known as cash-basis accounting, cash receipts and disbursements method of accounting or cash accounting (the EU VAT directive vocabulary Article 226) records revenue when cash is received, and expenses when they are paid in cash. As a basis of accounting, this is in contrast to the alternative accrual method which records income items when they are earned and records deductions when expenses are incurred regardless of the flow of cash. Cash accounting is usually used for smaller and simpler businesses.

In accounting, a basis of accounting is a method used to define, recognise, and report financial transactions. The two primary bases of accounting are the cash basis of accounting, or cash accounting, method and the accrual accounting method. A third method, the modified cash basis, combines elements of both accrual and cash accounting.

• The cash basis method records income and expenses when cash is actually paid to or by a party.
• The accrual method records income items when they are earned and records deductions when expenses are incurred.
• The modified cash basis records income when it is earned but deductions when expenses are paid out.

Both methods have advantages and disadvantages, and can be used in a wide range of situations. In many cases, regulatory bodies require individuals, businesses or corporations to use one method or the other.

In finance, arrears (or arrearage) is a legal term for the part of a debt that is overdue after missing one or more required payments. The amount of the arrears is the amount accrued from the date on which the first missed payment was due. The term is usually used in relation with periodically-recurring payments such as rent, bills, royalties (or other contractual payments), and child support.

Payment in arrear is a payment made after a service has been provided, as distinct from in advance, which are payments made at the start of a period. For instance, rent is usually paid in advance, but mortgages in arrear (the interest for the period is due at the end of the period). Employees' salaries are usually paid in arrear. Payment at the end of a period is referred to by the singular arrear, to distinguish from past due payments. For example, a housing tenant who is obliged to pay rent at the end of each month is said to pay rent in arrear, while a tenant who has not paid rental due for 30 days is said to be one month in arrears. Precise usage may differ slightly (e.g. "in arrear" or "in arrears" for the same situation) in different countries.

Accrual accounting in the public sector is a method to present financial information on government operations. Under accrual accounting, income and expenditure transactions are recognized when they occur, regardless of when the associated cash payments are made. The difference between public sector accrual accounting and cash accounting is most apparent in the treatment of capital assets (i.e. equipment, buildings, and public infrastructure that lasts many years). Under accrual accounting, expenditure on capital is added as an asset in the government's balance sheet in the year the capital is purchased, but the cost is not included in the year's budget as an operating expense.Instead, payment for capital used (i.e., the estimated depreciation or amortization) is included in that year's budget as an operating expense.

The usefulness of accrual accounting in the public sector remains in dispute. Advocates say a government that employs accrual accounting is less likely to underinvest in public infrastructure since large up-front capital costs are not recorded as a current period expenditure — rather, the expense is recorded over the years the capital is used (depreciates). Detractors counter that, following this reasoning, since the capital purchase does not generate a current period expense, accrual accounting may encourage excessive spending on capital and borrowing.