Accrual Basis
Revenues are recognized when earned, and expenses are recognized when incurred. Under the accrual basis of accounting, when cash is received or spent is of no immediate consequence.
Cash Basis
Revenues are recognized when cash is received, and expenses recorded when cash is paid. However, the cash basis is not considered to be compliant with GAAP (Generally Accepted Accounting Principle).
To better understand the difference let's look at an example.
Example 1: On May 1, 2018, X Company purchases an insurance policy that will provide coverage from May 1, 2018 through April 30, 2019 for $36,000 cash.
Under the cash basis of accounting we would make the following journal entry:
Cash basis journal entry
Journal Entry 5/1/18
                          Debit   CreditÂ
Insurance Expense   $36,000
  Cash                                  $36,000
Under this method the expense is recognized all up front, therefore, no adjusting journal entries are required.
Accrual basis journal entry
Journal Entry 5/1/18
                          Debit   CreditÂ
Prepaid Insurance   $36,000
  Cash                                  $36,000
To record the purchase of an insurance policy
Under this method, the expense is recognized when cash is paid out.
