Cash vs. Accrual Basis of Accounting
Cash Basis of Accounting
Cash Basis of Accounting uses receipts and payments of cash to record incomes and expenses. Therefore, under the cash basis of accounting, if a corporation makes salary payments of January, 3 months later in April, it will be considered as expenses in the month of April, since that is when the cash was paid. Also, if the same company pays advance salary for the month of May in April, then it will be considered as an expense for April.
Similarly, the time companies spend doing value addition to their products, shows up in the books as expenses. Only when sale is closed and cash comes in the door, is income recognized. Cash basis of accounting considers advance payments as income since the cash has been received.
There are obvious problems with cash basis of accounting. They are as follows:
Accrual Basis of Accounting
On the other hand, accrual basis of accounting, recognized income when it is earned and recognizes expenses when they are incurred:
We use a combination of cash and accrual basis of accounting. The profit and loss account and balance sheet are prepared as per accrual basis while the cash flow statement tells about the cash situation of the firm.
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- Debits and Credits in Accounts
- Golden Rules of Accounting
- Fundamental Principles of Accounting
- What is Single Entry System
- Double Entry Bookkeeping System

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