Question

What is the difference between cash basis accounting and accrual basis accounting? Discuss the pros and cons of each method of accounting. Why would a company want to use cash accounting vs. accrual accounting and vice versa? Participate in follow-up discussion by critiquing your classmates' posts and/or defending their challenges to your post.

Answer 1

Difference between Cash and Accural basis of Accounting

Basis	Cash Basis	Accural Basis
1.Income	In this Method We record the Income When it is Received.	In this Method We Record the Income When it is Earned
2.Expense	In this Method we record the Expense when it is Paid.	In this Method we record the Expense When it is being Due.
3. Standards	It does not go with the Accounting Standards	It follows the every accounting Standards.
4. Matching Principle	It does not follows the Matching Principle.	It follows the Matching Principle/

Cash Basis

Pros

1- It is the easiest way of accounting because in this method no adjustment entries is being passed.

2- We can have exact look on Cash flow transactions.

3-No expert knowledge is required to understand the financial Reports of the company which is prepared on the basis of Cash.

Cons

1- We do not get the correct picture of the financial Reports,which might give flasify financial postion of the compamny.

2-It do not flow one of the GAAP basic principle that is  Matching Principle.

Accural Basis

Pros

1-It provides the true and fair view of financial statements which tells us the correct financial position of the company.

2-It follows the all GAAP Principle .

3-It gives more reliability to Investors,Creditors and other stakeholders.

Cons

1-It is more complex method than the cash basis.

2-It involves certain estimates which can distort the financial reports.

3-It require too much time and efforts to prepare the financial reports because it has the adjustment entries.

Circumstance in which Company uses Cash Basis

1-When Compny want to pay its taxes when they receive the payment not when they earn the income.

2-When Company does not want to spent much on their accounting system because it cheaper to adopt,

Circumstance in which Company uses Accural Basis

1-When company wants a detailed analysis of their each transactions occured in the company and want to make their accounts comparable.

2-When they want to raise the money from Creditors and Investors in that situation company follows the accural basis of Accounting.