ACRRUAL BASIS ACCOUNTING VERSUS CASH BASIS ACCOUNTING

Whereby the difference between accrual basis accounting and cash basis accounting methods can be
illustrated by describe each method whereby

Accrual basis accounting method this is where revenues are recognized on income statement when
they are earned than recording when cash is received, and expenses also recorded as have incurred

It is a method of accounting which is recognized and required by GAAP to be practiced by big companies
and organizations since it clearly identifies the actual revenues that were earned, and expenses incurred
at an accounting period like in a year, quarterly or monthly

It involves Adjusted trial balance which is prepared after adjusting entries have been prepared and
posted to the ledger

Revenues like bills which have not yet been recorded, are recognized as earned irrespective of whether
cash is received or not.

Expenses which have been incurred in accounting period but not paid are also recorded and added to
the total expense account under income statements

WHERE AS;

Cash basis account method

is the accounting method which is not recognized and advised to be used by companies or organizations
under” GAAP” where revenue is recorded when cash is received no matter when it was earned, and
expenses are recorded as expenses when paid no matter when “incurred”.

Its basically used by small companies like shops family business that doesn’t have shareholders and
creditors since they don’t need to comply with GAAP guidelines

It’s a much simpler method though in a short run it may mis lead financial statements since it doesn’t
clearly identify when revenues were “earned”, and expenses were incurred

Walther, L. M. (2012) `Accrual Versus Cash Accounting’ Principles of Accounting Retrieved from:
https://www.principlesofaccounting.com/chapter-3/accrual-accounting/