A credit card transaction is often not paid off for a month or so later, making it easier to track through accrual accounting.
Accrual accounting refers to the practice of recording financial transactions when they are incurred as opposed to when cash is actually transferred. This is in contrast to cash accounting, in which transactions are recorded only after money has changed hands. For instance, a bakery buys a new oven in May, but the payment is not due until July. Under an accrual accounting system, the expense is recorded in May when it was first incurred. The assumption is that once the oven is bought, it will likely be paid for, in this case within a few months. Under a cash accounting system, the expense would not be recorded until it is paid off in July.
While cash accounting can be useful for keeping track of cash in very small businesses, accrual accounting is more commonly used by larger operations. It better reflects the nature of loans, credit card sales, revenue stream and long-term credit projects. It also allows all sales to be recorded at the same time when they occur. For these reasons, accrual accounting is generally considered to be a more accurate picture of the current state of a business that the cash option.
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