Question

act1 Describe cash accounting and accrual accounting systems and the relevant advantages and disadvantages of each. (150–180 words)

Answer 1

Meaning of cash accounting- In cash basis of accounting, we records any business transaction in books and accounts only when if there are cash pay or receive from transaction.

Meaning of accrual accounting- In this accounting we records all business transaction in the year in which they occurred. We not consider cash payments and receipts from transaction.

Advantage of cash system-

• This method is easy in understanding.

• Widely use by small business because their are flexibility and easy to maintain records in this system.

• This method show all cash flows during a period.

Disadvantages of cash system-

• This method is not useful for large business firms and companies.

• This method do not provide correct profit & loss, financial position of a organization.

• This method not allowed to us by laws, IRS.

Advantages of accrual accounting-

• This system of accounting calculate correct profit & loss, financial position of an organisation.

• This method is approved for use by IRS and other relevant laws.

• This method show correct long term cash flows of company.

Disadvantages of accrual method-

• This is useful for large business firms & companies, not feasible for small business entity.

• There is much complex in use and understanding than cash system.