Accrual Accounting Vs Cash Basis Accounting in Odoo

Odoo Supports Various Methods Of Recording Transitions Where Cash Basis & Accrual Accounting Are The Main Accounting Methods

What is Cash Basis Accounting?

Cash basis accounting is done when payments are made before confirming an invoice. Thus, it refers to a system recording transactions when cash is received or paid. It is considered a simpler form of accounting that involves actual cash transfers.

It is often used by small businesses and individuals mainly due to its simpler process. Cash accounting is not taken into consideration when accounts are receivable or payable. Talking about the construction industry, some may prefer cash-based accounting as they have to work on long project cycles that get delayed payments

Tutorial- Cash Basis Accounting in Odoo

  First, let’s begin by switching to cash basis accounting in Odoo: 

Go to the accounting settings-> Odoo dashboard-> Accounting-> Configuration->Settings.  

● Then, enable the cash basis method in the settings by clicking on the box next to it, and save your changes

  Now, we can also create an expense record, here maintenance expense refers to the amount paid by the company. 

● Go to Accounting-> Reports -> Profit and Loss and select the Cash Basis method. 

● Then we can see the expense paid by the company

What is Accrual Accounting?  

When the payment has not been received and the expenses are not paid by the company, you can log the revenues and expenses that incur using accrual accounting. Aligning with the matching principle, the revenue and expenses are recorded in the same time frame. In this method, cash is either not fully paid or received by the company.

Additionally, this method can be helpful in providing a detailed view of a company’s financial performance over a period. Thus, it can help in creating accurate financial statements and plan future budgets. It is suitable for larger businesses, and publicly traded companies.

Accrual Accounting in Odoo

 Accrual accounting is the standard method in Odoo. It automatically uses the accrual mode, unless you switch to a cash basis method. You can verify or switch back to accrual accounting from the cash basis method by simply following the steps as above. 

Comparing the two- Accrual Accounting and Cash Basis Accounting

Transaction recordings can be pursued using various methods, where accrual accounting and cash basis accounting can be considered as primary ones. While there can be many differences between them, timing of recording a transaction becomes a major one. Cash basis and accrual accounting differ in how transactions are recorded: immediate money exchange in cash basis and billing in accrual. Despite potential outcome similarities over time, timing of revenue and expense recording varies.

  The various point of differences are depicted in the table below:

Choosing the Right Option For Odoo Accounting

The right answer depends on the type and extent of your business. With respect to the construction accounting, it has a project-based work system and long-term production cycles, where the contractors prefer to segregate their revenues and profits for the ease of organizing each project. In terms of the cash basis method, advantages can include easy use, immediate access to cash balance, and a simplified approach. For accrual accounting, it can prove beneficial in providing detailed financial assessment. 

Therefore, in case of short-term projects, a cash basis can be a better option as it can be a straightforward approach. As for a large company, an accrual basis will work for better taxiing procedures.

Conclusion

Your business type and goals are determinants of your choice. If your business thrives on simplicity and a controlled cash flow, cash basis accounting can be a good choice. For more detailed financial scope, accrual accounting can be ideal. As per the needs of your business, you can choose either of the methods with the help of Odoo accounting which supports both.  

If you want to optimize Odoo accounting as per your business needs, you can reach out to Silent Infotech. With a team of experts, they can customize and streamline your accounting procedures, while also mastering Odoo accounting. You can further improve your accounting methods, and improve the overall efficiency.