Cash Basis vs Accrual Basis Accounting

Topics: Generally Accepted Accounting Principles, Income statement, Business Pages: 2 (800 words) Published: September 23, 2010
Compare and Contrast Cash Basis Accounting and Accrual Basis Accounting The major objectives for business entity are to earn profit. Every company keeps their financial records and prepares their financial reports. There are two main accounting methods which are used to keep recording of the business. They are cash basis accounting (cash method) and accrual basis (accrual method). Either of any method can use in businesses. Company can choose the method which is benefit for them. The cash basis is the most simple in that the accounting records are kept on the actual flow of cash in and out of the business. Revenues are recorded when cash (or cheque) is received and expenses are recorded when they are actually paid. The cash basis is approach is used by small business entities and sole proprietors who are conduct most of their activities in cash. In this way income and expense is more accurate. Moreover the cash basis justified for a business because they have few receivables and payables. Accrual basis is a accounting method which transactions are counted when the item is delivered or the service occurs. Accrual basis of accounting, revenue is recognized in the period in which a business sells goods or performs services. This means revenues are recorded when they are earned, even though the cash transactions to support them occur later. And expenses are recorded when they are incurred, this may be before or after they are paid. For example, if your company sold $1000 furniture in January 1 2009 but was paid in January 15, 2009, after the furniture was shipped. In the accrual basis, the credit of the $1000 would be counted on January 1st, even though it had not yet been realized. Under the cash basis accounting system would record that $1000 on January 5th, the day the cash is realized. c Cash basis accounting recognizes income when money is received. Accrual basis accounting recognizes income when goods are shipped. Therefore, income is entered into their...
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