Accrual Basis Vs. Cash Basis

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Abstract This is a discussion of two types of accounting methods that most companies use, accrual basis or cash basis. A definition of both concepts and comparisons between the two methods will be discussed. In addition, it describes and examines the difference in the managing of those methods and which form of accounting method is more useful and beneficial to provide information to users for different purposes. In cash basis accounting, revenue is recorded only when the cash is received, and expenses are recorded only when cash is paid. The Generally Accepted Accounting Principles (GAAP) prohibits preparing an income statement using the cash basis of accounting as it violates the matching principles and revenue recognition. An…show more content…
These two methods are based on different principles, and there are major differences between the two systems. Definition Cash Basis Cash basis accounting produces a measure called net operating cash flow. This measure is the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers. (Spiceland, Intermediate Accounting, 2011, pp. 6-7) Accrual Basis Accrual basis accounting is the measurement of resources provided by revenues and the measure of expenses. The difference of these two measurements is net income or net loss if expenses are greater than revenues related to providing goods and services to customers. (Spiceland, Intermediate Accounting, 2011, pp. 6-7) Advantages and Disadvantages Cash Basis When considering the use of cash basis accounting, it is important to understand the following advantages and disadvantages: • Accurate Tracking of Cash Flow Cash basis accounting gives an accurate reflection of a businesses’ cash flow. Since it only records revenue and expenses when they actually occur, the business knows how much cash it has on hand in that particular moment. • Inaccurate Representation of Long-Term Revenue and Expenses While cash accounting accurately tracks cash flow, it gives a false impression of revenue and expenses. This method may show a negative cash flow, even though you anticipate receiving payments in the next period. •
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