Question

Give an example of cash accounting, accrual accounting, and modified accrual accounting?

Answer 1

Cash accounting is a method of accounting under which revenues are recognized when cash is received and expenses are recognized when cash is paid irrespective of whether the revenues and expenses have accrued or not.

Example - Cash received and recorded as revenue on January 2, 2018, for services provided in December 2017. In this case, revenue was earned in 2017 but not recorded in that year because cash was not received. Revenue was recognized in 2018 when the cash was actually received.

Accrual accounting is a method of accounting under which revenues are recognized when they are earned and expenses are recognized when they are incurred irrespective of whether cash has been received or paid or not.

Example - Revenue recognized on December 30, 2018 for services provided on account with payment due on January 5, 2019. In this case, though cash was not received, but revenue was recognized because the services have already been provided and revenue has already been earned.

Modified accrual accounting is a method of accounting which combines the aspects of both cash accounting and accrual accounting. This method of accounting is used by the government entities.

Example - Recognition of inventory and prepaid items as expenditures when cash is paid and non-recognition of depreciation expense. This is an aspect of cash accounting. On the other hand, recognition of taxes receivable as revenue even before the cash is received is an aspect of accrual accounting.