Accrual and Cash Accounting

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Accrual and Cash Accounting The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is received and for expenses only when the money is paid out. On the other hand, the accrual method accounts for revenue when it is earned and expenses goods and services when they are incurred. The revenue is recorded even if cash has not been received or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses. Cash Basis Accounting is the accounting system that recognizes cash when it is received and bills when they are paid. In the Accrual Basis Accounting revenue is recognized when it is earned and expresses when bills are received, regardless of when cash changes hands. Cash bashes only records revenue when cash is received. Cash basis. Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees. Accrual basis. Revenue is recorded when earned and expenses are recorded when consumed. The timing difference between the two methods occurs because revenue recognition is delayed under the cash basis until customer payments arrive at the company. Recognition of expenses under the cash basis can be delayed until such time as a supplier invoice is paid. Revenue recognition. A company sells $10,000 of green widgets to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice. Expense recognition. A company buys $500 of office supplies in May, which it pays for in June. Under

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