There are two based types of accounting measurement to determine the profit. They are cash basis and accrual basis. Business can use either a cash basis or accrual basis to work there profit. However, most of the company prefers to use accrual basis instead of others. In this essay, I will compare the difference between cash basis and accrual basis on expense and revenue. In addition, how can company choose their measurement of profit will also be discussed.
Cash basis & accrual basis
Cash basis accounting is focus on cash flow, the companies record the revenue and expense when the cash flow really comes into their account. In other words, revenue is record when cash is received and expense record when cash is paid. (Bushman 2007) cash basis does not record payment or cash received on credit. As a result, it has fewer journals than accrual basis accounting like sale journal, purchase journal.
Small companies also prefer this record method; however, it has both advantages and disadvantages. For the advantages, cash basis accounting is easier and cheaper to manage and record. If your business is only a small company or the major sale is based on cash, and you don not maintain any inventory. The cash basis accounting will suit for you and reduce you expense on record-keeping. In addition, if a company sells their stock on credit, the cash did not come into their account, but they have already sold their stock and received income from it. The income is not subject to taxation until the money actually received. (Wiley 2006) or the disadvantages, cash basis accounting can not match the expense and revenue to the accurate ones. For example, if you sell some thing on credit but did nor receive the money in this financial year, this revenue will not be record to the account and this lead to a mistake in your profit account.
Accrual basis accounting means income recognized when the anticipated inflow of economic benefit cab be reliably measured and...