Accounting and Cash-Basis Accounting

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What is the difference between accrual-basis accounting and cash-basis accounting? The variation between accrual basis accounting and cash basis accounting, is how cash is documented. Cash basis is an accounting basis that is used when expenses and revenue are paid out or received. This is when the transaction will be recorded. In accrual-basis accounting, transactions are recorded when they actually happen. Payment does not need to be made for the transaction to be recognized in accrual-basis accounting unlike cash-basis. Both accounting systems have pros and cons. For example, accrual-basis accounting is excellent when it comes to matching revenue and expenses, but it is not good at recording cash. According to chapter three of Adjusting the Accounts, “Cash-basis accounting is not in accordance with generally accepted principles GAAP (Generally Accepted Accounting Principles)” (Weygandt & Wiley & Sons, 2008, p.95).

Why would politicians prefer the cash basis over the accrual basis? The accrual basis of accounting is necessary in financial accounting. The separation between financial accounting and managerial accounting is clear and is generally used in accounting. GAAP (Generally Accepted Accounting Principles) require the statement to ensure information provide on financial statements, it should be both useable and understandable to creditors, investors, and shareholders. Without the guidelines established by GAPP the accounting standards would not be consistent, corporations and other business entities could report transactions however they want. The politicians would prefer the cash basis accounting over accrual because, they would be able to borrow and spend money however they pleased. There would be no explanation on where the money went on cash basis since it is not as detailed as accrual basis accounting.

Weygandt, J.J. (2008). Financial Accounting (6th ed.). Hoboken, NJ: John Wiley & Sons.
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