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What is the difference between cash basis and accrual basis accounting? Why do accrual basis financial statements provide more useful information than cash basis financial statements? Describe when each method (cash basis and accrual basis accounting) would be appropriate to use.
* Cash basis accounting recognizes revenues when cash is received and records expenses when cash is paid. Which means that cash basis net income for that period is the difference cash receipts and cash payments. It is not consistent with generally accepted accounting principle. Cash basis accounting is important and useful for several business decisions and this is way it is a most that companies report a statement of cash flow.
* Accrual basis accounting uses the adjusting process to recognize revenues when earned and to match expenses with revenue.
The crucial difference between cash basis accounting and accrual basis accounting is in how a company records their cash transactions. Cash basis accounting records all transactions in the books when cash actually changes hands (cash payment is received or paid out by company for purchases or other services). Payments can be in the form of cash, check, and/or credit or debit card. Most companies start out with cash basis accounting. Most sole proprietor or small partnerships company use cash basis because it’s easy. Cash basis accounting does a good job of tracking cash flow. But it does do a poor job of matching revenues earned with money laid out for expenses. No receivables or payables are recorded. Cash basis does not provide a system for managing unpaid bills. When a company uses accrual basis accounting, they record all transaction in the books when they occur even if no cash changes hands. Accrual accounting does a good job of matching revenues and expenses but does a poor job of tracking money....