Question

Mention any three points of distinction between cash basis and accrual basis of accounting

Answer 1

Answer:

Cash Basis Accounting

As per cash basis of accounting, we record revenues on receipt of cash, and expenses on their payment. Cash basis of accounting does not recognize accounts receivable or accounts payable.

All transactions related to revenues, costs, assets, and liabilities are reflected in the accounts for the period in which actual receipts or actual payments are made.

Many small enterprises opt to use the cash basis of accounting. It is simple to maintain. We can easily find out when a transaction has occurred and there is no need to track receivables or payables.

The cash method also helps to determine how much cash the business actually has at any given time. We can look at our bank balance and understand the exact resources at our disposal.

Accrual Basis Accounting

As per accrual basis, we record revenues and expenses when they accrue, regardless of the actual receipt or payment of the amount. This basis is more commonly in use than the cash basis.

The accrual basis provides a more realistic idea of income and expenses during a period of time. This method provides a long-term picture of the business that cash accounting cannot provide.

The downside of this method is that accrual accounting does not give any awareness of cash flow. An enterprise can appear to be more profitable while in reality, it has no balances in bank accounts.

Accrual basis accounting without careful monitoring of cash flow can have potentially adverse consequences.