Difference Between Cash Basis and Accrual Basis Accounting

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There are two main principles for keeping track of the business income and expense which are “Cash Method” and the “Accrual Method”. In this essay I will define and explain each of the methods. Then I will highlight the difference between the two methods, in addition to discussing the advantages and disadvantages of both methods and which is better to use in modern business enterprises or small business. What is Cash Basis Accounting? Cash basis accounting is the method in which cash receipts and cash payments are recorded during the period in which they. Under the cash basis accounting method, the revenue is recognized when the cash is received and the expense is recognized when the cash is paid. Cash basis accounting does not recognize promises to pay or expectations to receive money or service in the future, such as payables, receivables, and prepaid expenses. Example: A computer software company finished a computer software implementation project in February. But it will get the check to receive the money in April. In cash basis accounting, the check or cash will be recorded in April (when the cash is received). Another Example: The computer software company bought some computers for $10,000 on credit on January. The company will pay the actual amount of the computers in March. In Cash basis accounting, the money will be recorded in March. (when the cash is actually paid). What is Accrual Basis Accounting? Accrual basis accounting is the method in which revenue is recognized when earned, and expenses are recognized when incurred. When revenue is recognized before cash is received, it is recorded in an accrued revenue account, such as accounts receivable. When revenue is recognized after cash has been received, it is recorded in a deferred revenue account, such as unearned revenue. When an expense is recognized before cash is paid, it is recorded in an

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