Question

contrast cash vs. accrual accounting.

explain the difference

Answer 1

Cash basis of accounting is a system in which transactions are recorded when cash is received or paid i.e. entry is not recorded on the basis of payment or receipt becoming due. It means revenue is recognized on receipt of cash and expenses are recorded when cash has been paid for them. It further implies that when cash basis of accounting is followed, outstanding expenses, accrued income etc are not considered. This method of accounting is suitable for those enterprises where most of the transactions are made on cash basis.

Under Accrual Basis of Accounting, income is recognized when it is earned or accrued, irrespective of the fact whether the cash has been received or not against such income. For example. credit sale is recognized as sale whether amount has been received or not. Similarly if an expense has been incurred but payment has not been made it will be recorded as an expense. For example rent for the month of March has not been paid, it will still be recorded as an expense since the same had become due. It is a more reliable method when compared to cash basis of accounting since it records both cash and credit transactions and thus reveals correct profit or loss besides assets and liabilities.

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