Question

Cash vs. Accrual Accounting: Explain the difference between the cash basis, modified cash basis, and the accrual basis measures of performance. Provide examples of accounts that are treated differently under the three methods. Be sure to review the related PowerPoint Presentation in the Unit 3 Presentations/Lectures and in the Supplementary Materials. Why, in most cases, does accrual basis net income provide a better measure of performance than cash basis net income? Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting. Which generally accepted accounting principle (GAAP) rule does accrual accounting fulfill

Answer 1

Cash basis is method of accounting in which transactions are recorded on cash basis.Receipts and payments in cash are considered.

Modified Cash basis is combination of cash and accrual accounting methods.Accrual method is used for long term balance sheet items and cash basis is used for short term items.

Accrual basis is method under which transactions are recorded on basis of occurrence.Expenses are recorded when incurred and Incomes are recorded when occurred.

Take an example of rent account

In cash basis rent is recorded when it is actually paid.

In Accrual method it is recorded when it is incurred whether paid or not.

In modified basis rent ( expenses) is covered in short term hence it is recorded on cash basis.Fixed assets and debt are recorded on Accrual basis.

Yes Accrual basis provide better measure of performance than cash basis .Because in Accrual basis we can get accrurate  position of income and expenses .

Adjusting entries are those which are passed on year end to record accruals and deferrals in Accrual basis.For example rent accrued but not paid ,In its journal entry Debit the expense (rent) and credit the rent payable.

Matching principle fulfill or govern the Accrual accounting.