Cash vs Accruals Accounting
  • Updated on 10 Jul 2019
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Cash vs Accruals Accounting

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Overview

Mambu supports the two main accounting methodologies - Cash and Accruals based accounting - which you can choose between based on your internal operations.

The key difference between the two methodologies is the moment when income or expenses are recognized on the General Ledger.

While cash accounting recognizes incomes or expenses only when a payment is made or received, accruals recognizes them at the moment they accrue for the organization, regardless of whether a cash transaction occurs or not.

Please Note
You can select the methodology for each of your products independently.

Accounting Rules - Methodology drop-down with None, Cash, Accrual options


Cash

With this methodology, income is recognized when cash is received (i.e., when a client actually pays a bill or interest) and an expense when cash is paid (i.e., when the organization pays a bill, not when the bill is received).

Example: On May 1, 2010, Company A borrowed $100,000 from our institution with a 12% yearly interest rate and pays off the loan in full at the end of June:

Journal entry on May 1, 2010

Debit Credit
Loan Portfolio 100,000
Cash 100,000

Payment received on June 30, 2010

Debit Credit
Cash 102,000
Loan Portfolio 100,000
Interest from Loan Portfolio 2,000

Accruals

Under the accrual accounting, incomes and expenses are recognized when they are accrued, not when the money is actually exchanged.

Income

Income is recognized when both of the following conditions are met:

  1. Income is earned.
  2. Income is realized or realizable.

Income is earned when products are delivered or services are provided.
Realized means cash is received.
Realizable means it is reasonable to expect that cash will be received in the future.

Expenses

Expenses are recognized in the period when they occur and not only when paid.

Example: On May 1, 2010, Company A borrowed $100,000 from our institution with a 12% yearly interest rate and pays off the loan in full at the end of June:

Journal entry on May 1, 2010

Debit Credit
Loan Portfolio 100,000
Cash 100,000

Interest posted to account on May 31, 2010

Debit Credit
Interest Receivable 1,000
Interest Income 1,000

( $100,000 x 12% x 1/12 = $1,000 for this  month )

Interest posted to account on June 30, 2010

Debit Credit
Interest Receivable 1,000
Interest Income 1,000

( $100,000 x 12% x 1/12 = $1,000 for this  month )

Payment received on June 30, 2010

Debit Credit
Cash 102,000
Loan Portfolio 100,000
Interest Receivable 2,000

Sources:


Interest Accrual in Accounting

For Accruals methodology you can choose between Daily and Monthly Interest accrual methods.

Interest Accrual Method in Accounting with Daily and Monthly options.

The total accrued interest will be booked on the last day of every month for Monthly accrual, and for Daily accrual they will be posted daily at 23:59:59, the time of the organisation.

Every time the accrued interest is booked, the previous monthly journal entries will be reversed and the new ones with the current interest accrued will be logged.


Method Transition

If the method is changed on an active product (e.g. mid-month, the method is changed from Monthly to Daily) the journal entries will be reversed, to be in accordance with the newly selected method. The same applies when transitioning from Daily to Monthly - on the next End of Day Process execution, the daily journal entries will be reversed, adding instead monthly entries at the end of the month.

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