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Accrual and cash based accounting

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Running head: ACCRUAL ACCOUNTING AND CASH BASIS
Accrual Accounting and Cash Basis
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ACCRUAL ACCOUNTING AND CASH BASIS
Accrual Accounting and Cash Basis
Part A
The difference between the cash basis and accrual accounting is the timing whereby the
revenues and expenses are recognized. Small business owners and private financier’s use the cash
based accounting, whereas large business owners and big companies uses the accrual based
accounting to report revenues and expenditures on their statement of account. Cash based
accounting accounts for expenses after paying the money and for the revenues after the receiving
the money (Smith, 1999). The cash based accounting entails the reporting of revenues in the
income statements after receiving cash from the customers and reporting the expenses in the
income statements after paying out the cash. Besides, the accrual basis of accounting entails the
reporting of revenues on the income statements after earning; it mostly occurs before receiving the
cash from the customers (Das, 2006). The entrepreneur reports the expenses on the income
statements after they occur; it mostly takes place in the period different from when the entrepreneur
paid the expenses. Based on the clients business and the accounting system, the client would
consider the cash basis of accounting in the initial stage of his business; for instance, in the first
six months or one year after starting his business. However, after his business peaks and he is in a
position to enjoy many profits, he will consider the accrual basis accounting system.
Part B
From Mr. Jones sale of used cars (inventory), he will need to apply the accrual accounting in
reporting his revenues after some years in his business, because of the high amount of income
gained from a sale of only one vehicle. Furthermore, he will consider the cash basis accounting
system in the initial stage of his business since his business is still a small-scale type of business

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Running head: ACCRUAL ACCOUNTING AND CASH BASIS Accrual Accounting and Cash Basis Student’s name Institution Affiliation 2 ACCRUAL ACCOUNTING AND CASH BASIS Accrual Accounting and Cash Basis Part A The difference between the cash basis and accrual accounting is the timing whereby the revenues and expenses are recognized. Small business owners and private financier’s use the cash based accounting, whereas large business owners and big companies uses the accrual based accounting to report revenues and expenditures on their statement of account. Cash based accounting accounts for expenses after paying the money and for the revenues after the receiving the money (Smith, 1999). The cash based accounting entails the reporting of revenues in the income statements after receiving cash from the customers and reporting the expenses in the income statements after paying out the cash. Besides, the accrual basis of accounting entails the reporting of revenues on the income statements after earning; it mostly occurs before receiving the cash from the customers (Das, 2006). The entrepreneur reports the expenses on the income statements after they occur; it mostly takes place in the period different from when the entrepreneur paid the expenses. Based on the clients business and the accounting system, the client would consider the cash basis of accounting in the initial stage of his business; for instance, in the first six months or one year after starting his business. However, after ...
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