What is the Difference Between Cash and Accrual Accounting?

On a fundamental level, there are two methods of accounting: cash and accrual. These two methods differ in the recognition of revenue on a school’s income statement. Blackbaud Tuition Management^TM supports both methodologies, so let's take a closer look to better understand which accounting practice is best for your school. 

The Cash Method of Accounting 

Under the cash method of accounting, transactions are only recorded when cash changes hands. This means that revenues are recognized when cash is received, and expenses are recognized when they are paid. While this method is straightforward and easy to understand, it fails to adhere to two tenets established in Generally Accepted Accounting Principles (GAAP): the revenue recognition and the matching principle.   

The revenue recognition principle states that revenues should be recognized in the period in which they are earned, which isn’t always when cash is received. The matching principal calls for expense recognition to occur in the period that the related revenues were earned—this also doesn’t always correspond to the outflow of cash. 

If a school is using the cash method of accounting, it does a good job of tracking the school cash flow, but it does a poor job of matching its revenues earned with money laid out for expenses. 

The Accrual Method of Accounting 

In the accrual method of accounting, revenues and expenses are recognized in the period when they are earned and incurred, regardless of when the money was received or paid. Under this method, the recognition of revenue and collection of cash are independent of each other. 

GAAP requires schools to use the accrual method because it provides a better picture of profits and financial position during an accounting period than the cash method. The reason for this is that the income statement prepared under the accrual method will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues (matching principles). 

Blackbaud Tuition Management

Blackbaud Tuition Management supports both accounting practices. Schools can run reports that allow monthly journal entries to be booked on cash or accrual methods of accounting. Plus, when schools use the accrual method, we have an available integration to send batch journal entries from Blackbaud Tuition Management into Blackbaud Financial Edge^®. 

About the Author

Donovan Dixon is a senior accounting specialist on Blackbaud's Professional Services team. He joined Blackbaud in 2015 and has over 13 years of accounting experience for private and public companies. A native of Kingston, Jamaica, Donovan is also an ordained minister, and in his leisure time, he enjoys jogging, soccer, and table tennis. <br><br>Viral Mistry is a service delivery associate on the Services team focusing on Blackbaud Tuition Management. A graduate of Rutgers Business School with a degree in Accounting and Management Information Systems, he's been helping schools as part of the Blackbaud team since 2016. When he's not hard at work, Viral enjoys playing video games and golfing.

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