Accrual Basis And Cash Basis Accounting.

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The major difference between accrual and cash basis accounting is the timing in

receiving the cash or paying the cash. In cash basis accounting, revenue is not accounted for

untill the money is received, and the expense is too accounted for only when the money is

paid for (Khan, p.21).

On the other word, in accrual basis of accounting, revenue is accounted for once it is

earned even if the cash is yet to be received, and expenses are accounted for when they are

incurred even when no cash have been paid (Khan, p.22).

Cash basis does not require high knowledge in accounting and it can be used by a

person with little knowledge about book keeping. It works best for small business. This

method has some drawbacks which makes it not recommended by GAAP which is an

abbreviation for General Accepted Accounting Principles and IFRS which stands for

International Financial Reporting Framework (Khan, p.23). Its drawbacks include the fact

that it does not coincide with the matching concept, lack of accuracy and failure to put in

consideration time lags in the occurrence of a transaction and its recognition.

Accrual basis is also referred to as mercantile system of accounting and it is regarded

as an effective basis of accounting as it is in line with the matching concepts where the

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expenses of a particular accounting period are matched with its revenue (Khan, p.24). The

major drawback of this method is that the company has to pay tax on the income which is not

yet received.

The gap between the occurrence and the recognition of revenues and expenses is the

major difference between the two accounting basis. Tax benefits is also another difference,

where a company with records kept on cash basis accounting enjoy tax benefits whereas in

accrual basis the company has to pay tax on the income which is not collected.

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Surname 1 Student’s Name Professor’s Name Course Date The major difference between accrual and cash basis accounting is the timing in receiving the cash or paying the cash. In cash basis accounting, revenue is not accounted for untill the money is received, and the expense is too accounted for only when the money is paid for (Khan, p.21). On the other word, in accrual basis of accounting, revenue is accounted for once it is earned even if the cash is yet to be received, and expenses are accounted for when they are incurred even when no cash have been paid (Khan, p.22). Cash basis does not require high knowledge in accounting and it can be used by a person with little knowledge about book keeping. It works best for small business. This method has some drawbacks which makes it not recommended by GAAP which is an abbreviation for General Accepted Accounting Principles and IFRS which s ...
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