Cash Basis and Accrual Basis Essay

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Cash Basis and Accrual Basis Cash basis is an accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred, rather than paid. The cash basis of accounting is usually followed by individuals and small companies, but is not in compliance with accounting's matching principle. It does not conform with the provisions of GAAP and is not considered a good management tool because it leaves a time gap between recording the cause of an action, sale or purchase, and its result of payment or receipt of money. It is, however, simpler than the accrual basis accounting and quite suitable for small organizations that transact business mainly in cash, which is also called cash accounting. Accrual basis is the accounting method under which revenues are recognized on the income statement when they are earned rather than when the cash is received. The balance sheet is affected at the time of the revenues by either an increase in cash, if the service or sale was for cash, an increase in accounts receivable, if the service was performed on credit, or a decrease in unearned revenues if the service was performed after the customer had paid in advance for the service. Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in cash if the expense was paid at the time the expense was incurred, an increase in accounts payable if the expense will be paid in the future, or a decrease in prepaid expenses if the
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