Dr. Ehab K. A. Mohamed
11th of March 2013
This assignment answers question # 2:
Distinguish between cash basis accounting and accrual basis accounting. Why for most business enterprises is accrual basis accounting acceptable and the cash basis accounting unacceptable in the preparation of an income statement and a balance sheet?
Cash basis accounting is an accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. The cash basis of accounting is usually followed by individuals and small companies; however it is not in compliance with accounting's matching principle so that in income statement some of revenues are earned but have not been paid yet and the same applies for some expenses while they are occurred and have not been recorded yet because they have not been paid yet. Accordingly you may have an income statement that doesn’t accurate results of operation for a specific period of time.
Under the accrual basis of accounting, revenues are reported on the income statement when they are earned and expenses are matched with the related revenues and reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific period of time. In order to understand more about the main difference between cash basis accounting method and accrual basis accounting method, let’s go through the following example; If I begin an accounting service in December and provide $10,000 of accounting services in December, but don’t receive any of the money from the clients until January, there will be a difference in the income statements for December and January under the accrual and cash bases of accounting. Under the accrual basis, my income statements will show $10,000 of revenues in December and none of...