Give 3 difference between cash basis of accounting and accrual accounting
Answers
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 Rs 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 Rs 5,000 is recorded as revenue immediately when the sale is made, even if you receive the money a few days or weeks later.
The same principle applies to expenses. If you receive an electric bill for Rs 1,700, under the cash method, the amount is not added to the books until you pay the bill. However, under the accrual method, the Rs 1,700 is recorded as an expense the day you receive the bill.