The difference in accrual vs cash accounting is timing. Under the accrual basis, a transaction is recorded when revenue is earned or a cost is incurred; under the cash basis, it is recorded only when cash is received or paid.
Which one shows your real profit? The accrual basis, because it matches each period’s revenue with the costs that produced it. The cash basis shows the movement of your cash box, and it can make a profitable month look like a loss simply because you paid a full year’s rent in it.
This article explains both methods, applies them to one example from a Saudi store, compares them in a table, and then sets out what the accounting standards endorsed in Saudi Arabia, the zakat rules and VAT expect, and how accounting software applies the accrual basis automatically.
What is Accrual Basis Accounting?
Accrual basis accounting records revenue when it is earned by delivering goods or services, and records expenses when the business benefits from them, regardless of when cash is collected or paid. It puts the accrual and matching principles into practice.
The accrual basis creates two groups of accounts that do not exist under the cash basis: accruals and prepayments. They are what make the income statement reflect the right period.
Accrued Revenue
Accrued revenue is revenue the business has earned but not yet collected. For example, a maintenance company completes its March service contract worth SAR 12,000 before VAT and will collect it in April. Under the accrual basis, the revenue is recorded in March and the amount sits in receivables or accrued revenue until it is collected.
Prepaid Expenses
Prepaid expenses are amounts paid in advance for future periods, recorded first as an asset and then turned into an expense month by month. For example, paying a full year’s rent of SAR 60,000 in January is recorded as prepaid rent, and SAR 5,000 is charged to each month.
On the other side are accrued expenses, such as a month’s salaries or commissions not yet paid, and deferred revenue, such as a customer’s advance payment before delivery.
What is Cash Basis Accounting?
Cash basis accounting records revenue when cash is received and expenses when cash is paid, regardless of the period the transaction relates to. It is closer to a cash book than to full accounting.
Its strength is simplicity: no accruals, no prepayments and no period-end adjustments. That is why some very small operators use it to follow daily liquidity. Its weakness is that it shows neither what customers owe you nor what you owe suppliers, and profit swings with the timing of payments rather than with the reality of the business.
You may also see the term modified accrual or modified cash basis, a mix that applies accrual to some items and cash to others. It is mostly associated with government accounting and is not used to prepare the financial statements of commercial businesses under the endorsed standards.
One Example, Two Methods: Credit Sales and Prepaid Rent
A store in Al Khobar makes SAR 30,000 of cash sales and SAR 40,000 of credit sales in January, with the credit sales collected in February. In January it pays the full year’s rent of SAR 60,000 and the month’s salaries of SAR 15,000. February’s trading is identical, with no new rent payment. Amounts are before VAT, and cost of goods sold is left out to keep the example simple.
| Line Item | January Cash Basis | January Accrual Basis | February Cash Basis | February Accrual Basis |
|---|---|---|---|---|
| Revenue | 30,000 | 70,000 | 70,000 | 70,000 |
| Rent expense | (60,000) | (5,000) | 0 | (5,000) |
| Salaries | (15,000) | (15,000) | (15,000) | (15,000) |
| Result | Loss of 45,000 | Profit of 50,000 | Profit of 55,000 | Profit of 50,000 |
On the cash basis, January looks like a loss-making month and February looks excellent, even though trading in both months was identical. The accrual basis shows the truth: the store earns about SAR 50,000 a month before cost of goods sold.
Under the accrual basis, these transactions are recorded with entries such as:
- Rent paid in January: debit prepaid rent 60,000, credit bank 60,000.
- At the end of each month: debit rent expense 5,000, credit prepaid rent 5,000.
- Credit sale: debit receivables, credit sales and output VAT; the receivable is cleared when the customer pays.
If you want to revisit the logic of the debit and credit sides in these entries, read our explanation of debit and credit in accounting.
Comparison Table: Accrual vs Cash Basis
The table summarises the practical differences between the two methods from a business owner’s point of view:
| Point of Comparison | Accrual Basis | Cash Basis |
|---|---|---|
| When revenue is recorded | On sale or service delivery | When cash is received |
| When expenses are recorded | When the benefit is received | When cash is paid |
| Customer and supplier balances | Shown in the books | Not shown |
| Accuracy of monthly profit | High | Swings with payment timing |
| Complexity | Needs adjustments and an accounting system | Simple |
| Fit with endorsed standards | Compliant | Not suitable for financial statements |
| Tracking liquidity | Through the cash flow statement | Directly |
The cash basis is a tool for watching the cash box; the accrual basis is a tool for measuring performance. A well-run business needs both, which is exactly what the cash flow statement provides alongside the income statement, as explained in our guide to the three financial statements in plain language.
If your books today are closer to the cash basis and you want to move to accrual without disruption, talk to the Daysum team about a transition plan and opening balances.
Which Basis Do Saudi Businesses Use?
Commercial businesses in Saudi Arabia in practice use the accrual basis to prepare their financial statements. Full IFRS and the IFRS for SMEs Standard, as endorsed by the Saudi Organization for Chartered and Professional Accountants (SOCPA), are built on the accrual basis for every statement except the cash flow statement.
Three regulatory frameworks point the same way:
- Zakat: the Executive Regulations for the Collection of Zakat apply SOCPA-endorsed standards to the terminology, accounting treatments and financial reports submitted to ZATCA. A person whose financial statements do not reflect the reality of the business is dealt with under the rules for estimated (deemed) assessment.
- VAT: under ZATCA’s tax invoicing guideline, VAT becomes due on the earliest of the date of supply, the date the tax invoice is issued, or the date payment is received. VAT on credit sales is therefore declared in the period of sale even if the customer has not paid yet.
- Companies Law: companies prepare their statements under approved accounting standards and file them with the Ministry of Commerce, and those standards are accrual-based.
So the practical question is not “which basis should I choose?” but “how do I apply the accrual basis with the least effort?”. A micro business can still track its cash box on a cash basis for day-to-day management, but should check with its accountant on the requirements for statements submitted to the authorities.
Also read: accounting principles for non-accountants, to understand the accrual and matching principles this basis rests on.
How Daysum Applies Accrual Accounting Automatically
In Daysum’s cloud ERP built on Odoo, bookkeeping works on the accrual basis by default, so users do not have to remember adjustments every month. Each document creates its entry in the right period:
- Sales invoices: record revenue, output VAT and the customer balance when the invoice is confirmed; the balance is cleared on collection.
- Supplier bills: record the expense or inventory, input VAT and the supplier balance when the bill is received, not when it is paid.
- Prepaid expenses: set a start and end date on a bill line and the system spreads the amount across the months with automatic deferral entries.
- Depreciation: depreciation on fixed assets is calculated periodically over the useful life.
- Cash tracking: aged receivables and the cash flow statement remain available to watch liquidity alongside profit.
Manual adjusting entries remain available with review and approval controls, as we explain in full control of journal entries with an integrated ERP.
Conclusion: The Basis That Shows Your Real Profit
The cash basis tells you how much is in the till; the accrual basis tells you how much you actually earned. The gap between them widens as credit sales and advance payments grow.
In Saudi Arabia, the endorsed accounting standards relied on by the zakat regulations and the Companies Law are accrual-based, and VAT becomes due as soon as goods are supplied or an invoice is issued. The accrual basis is therefore the practical choice for any business that wants accurate figures and acceptable financial statements.
If you want a system that applies the accrual basis automatically from invoice to financial statements, contact the Daysum team to review how your transactions are recorded today.
FAQs About Accrual Accounting
The difference is timing: the accrual basis records revenue when earned and expenses when incurred, while the cash basis records them when cash is received or paid. As a result, the accrual basis shows customer and supplier balances and prepaid expenses, while the cash basis does not. Profit under the accrual basis is a more accurate measure of performance.
The accrual basis is better for any business that sells on credit or pays expenses in advance, because it shows real profit and complies with the endorsed standards. The cash basis can help a very small operator watch the daily cash box, but it is not enough for financial statements. With accounting software that applies accrual automatically, the extra complexity no longer falls on the owner.
The Executive Regulations for the Collection of Zakat apply SOCPA-endorsed standards to financial reports submitted to ZATCA, and those standards are accrual-based. A person whose statements do not reflect the reality of the business is dealt with under the estimated assessment rules. It is therefore advisable to prepare statements on the accrual basis and to confirm your specific situation with your accountant.
Yes. VAT becomes due on the earliest of the date of supply, the date the tax invoice is issued, or the date payment is received. VAT on a credit sale is therefore included in the return for the period of sale, even if the customer has not paid. This is another reason to follow up collections closely so the business does not fund the tax from its own cash.
Modified accrual is a mix of the two methods that applies accrual to some items and the cash basis to others. It is mostly associated with government accounting and some non-profit entities. Commercial businesses prepare their statements on the full accrual basis required by the endorsed standards.
