Question

What is the difference between the cash basis and the accrual basis of accounting? Why is the accrual basis of accounting generally preferred over the cash basis?

Answer 1

Answer : The difference between the cash basis and the accrual basis of accounting are :

Cash basis of Accounting	Accrual basis of Accounting
Recognizes revenue when cash has actually been received	Revenues are recognized when they are earned.
Taxes are not paid on money that has not been received.	Taxes are paid on money that has not been received yet.
Expenses are recorded when cash is paid.	Expense are recorded when they are incurred irrespective of whether they are paid in cash or not.
It is not allowed under GAAP (Generally Accepted Accounting Principles)	It is allowed under GAAP (Generally Accepted Accounting Principles)

Accrual basis of accounting is generally preferred over cash basis of accounting because accrual basis gives a more realistic idea of income and expenses during a period of time, thereby providing a long-term picture of the business that cash accounting cannot provide and thus accrual basis of accounting better represent the financial health of an organization.