Question

How does accrual-basis net income differ from cash-basis net income?

Answer 1

First of all you should know the distiction between accrual and cash basis ,

In case of accrual basis all incomes are recognised when it is earned and expenses are recorded when accrued irrespective of whether cash inflow or outflow occured .

on other hand cash basis accounting is prepared on basis of cash inflows and outflows , we record income and expense when cash movement occurs.

so, when calculating net income accrual basis take income and expenses on basis of what is accrued and in case of cash basis it considers actual cash paid and recieved .

eg ;- revenue in accrued basis will be actual cash recieved , credit sale etc . but in case of cash basis only cash sales are recorded.

- depreciation ; in case of accrual basis we take depreciation for match revenue and income , but in case of cash basis it is irrelevent since depreciation is a non cash item

-in case of expenses such has purchase , wages , finance cost cash basis only take amount of cash paid but in case accrual we take accrued expenses.

so income and expenses differs in both methods so the net figure of income will differs. mainly accounts are prepared in accrual basis and for tax calculation we use cash basis net income