Question

Discuss the differences between cash and accrual accounting. What is one significant advantage of accrual accounting over cash accounting?

Answer 1

There are two different methods of accounting of any transaction.

Cash basis and Accrual basis

The difference between these two are as -

In the cash basis of accounting the revenue is recognised when cash is received and expenses when cash is paid whereas in accrual basis of Accounting revenue should be recorded when there is a right to receive and expenses should be recorded when there is obligation to pay.

Cash basis is of accounting does not record Accounts receivable or accounts payable at it does not considers the Credit transactions whereas in accrual basis it is considered.

Cash Accounting is simple and easy to maintain as compared to Accrual accounting.

Cash Accounting does not give the true and fair view of financial information as it doesn't consider the credit transactions. And at the same time Accrual accounting gives more realistic data regarding income and expense.

Accrual, Outstanding, prepaid and Advance etc are arises only due to Accrual concepts of Accounting. In cash basis these accounts doesn't exist.

One of the biggest advantage of using Accrual accounting over Cash Accounting is that Accrual Accounting provide more realistic data by considering the credit aspects also and thus gives a better picture of the financial information . It enable the users more informed.