Question

1. What is the difference between cash basis accounting and accrual basis accounting? Name five accounts only associated with accrual basis accounting and not cash basis accounting.

Answer 1

Differences between cash basis and accrual basis of accounting

Basis of differences	Cash Basis	Accrual Basis
Types of transactions recorded	Only cash transactions are recorded.	Cash and credit, both types of transactions are recorded .
Time of recording of revenue	Revenues are recorded when cash is received .	Revenues are recorded when it has been earned.
Timing of recording of expenses	Expenses are recorded when cash is paid.	Expenses are recorded when incurred or consumed .
Adjustment for outstanding and prepaid expenses	No adjustment entry required	Adjustment entry is essential for correct determination of profit.
Adjustment for advance and earned income	No adjustment is needed	Adjustment entry is mandatory for correct determination of profit .
Accuracy	It doesn't disclose profit accurately .	It does disclose profit accurately .
Users	Professional ,those are getting there fees in cash only and very small sole proprietorship business .	All publicity traded company ,most of the LLC , partnership firm etc.
Nature of calculation	Very simple	Technical in nature

List of accounts only associated with accrual basis of accounting and never been used in cash basis of accounting :

A) Prepaid expense

B) Outstanding expense

C) Income received in advance

D) Accrued income [ Income earned but not received ]

E) Account payable

F) Account receivable

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