Question

Discuss the difference between accrual basis accounting and cash basis accounting. Please remember to create your submission in your own words. Feel free to include brief quotes from your sources (with citations) but do not copy and paste from the source material.

250 words or more

Answer 1

In the Cash basis of accounting systems, we will record only those transactions in which cash is actually paid against the expenses and received against the income. whereas, in Accrual basis accounting systems, we will record transactions when expenses are incurred and it may be paid or not, and when the income earned and it may be received or not. In cash basis of accounting, revenues are recognized when cash is received and expenses are recorded when cash is paid. Whereas in the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred. In the Cash basis of accounting, financial statements do not show the actual financial position of an entity because total incomes and expenses are not shown in the books of the account.

Accrual basis of accounting requires technical knowledge as many adjustments for various items like prepaid expenses, outstanding expenses, capital items, and revenue items are recorded. Whereas, while doing accounting through Cash basis much of technical knowledge is not required. Account receivables and Account Payables are needed to be recorded on the Accrual basis of accounting, the same is not required in the accrual basis of accounting.

The cash basis of accounting is best suited for the small service companies, Non-Profit organizations, social associations; whereas the accrual basis of accounting is best suited for businesses whose financial statements need to be audited.

Accrual accounting is widely used than the cash basis of accounting.

Accrual basis of accounting presents the company's overall financial changes over a specific period.