Question

cash basis and accrual basis of according

Answer 1

Under the cash basis of accounting...

Revenues are reported on the income statement in the period in which the cash is received from customers.

Expenses are reported on the income statement when the cash is paid out.

Under the accrual basis of accounting...

Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers.

Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is made.

Answer 2

 

How does accrual accounting differ from cash basis accounting?



A:

The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized. The cash method is a more immediate recognition of revenue and expenses while the accrual method focuses on anticipated revenue and expenses.   

The Cash Method

Revenue is reported on the income statement only when cash is received. 

Expenses are only recorded when cash is paid out.

The cash method is mostly used by small businesses and for personal finances.

The Accrual Method

Revenue is accounted for when it is earned. Typically, revenue is recorded before any money changes hands. Unlike the cash method, the accrual method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future.  

Expenses of goods and services are recorded despite no cash being paid out yet for those expenses. 

Example of Accrual And Cash Methods 

Let's say you own a business that sells machinery. If you sell $5,000 worth of machinery, under the cash method, that amount is not recorded in the books until the customer hands you the money or you receive the check. Under the accrual method, the $5,000 is recorded as revenue immediately when the sale is made, even if you receive the money a few days or weeks later.