How does the accrual basis of accounting provide different results when compared with the cash basis? Which provides a better picture of a company’s performance? Why?
How does the accrual basis of accounting provide different results when compared with the cash basis? Which provides a better picture of a company’s performance? Why?
Cash Basis of accounting- Under cash basis, accounting entries are recorded as and when there are cash receipts and payments. That is any item of income and expenses are recorded only when there is cash payment made or cash received .
Example - An entity sells goods to customer on 31.12.2021 for $40,000 on credit basis. Customer paid for the same on 15.01.2022. Considering an accounting year ends on 31.12.2021 an entity which follows cash basis of accounting will record the sale on 15.12.2022
Accrual Basis of accounting - Under the accrual basis, accounting entries for incomes and expenses are recorded as and when they occur irrespective of cash received or paid .
Example - Office suppliers are brought by the entity on 27.12.2021 on credit basis for $35,000 and the same are paid on 12.01.2022.
For an entity using accrual basis of accounting will record expense in the financial year ending 31.12.2021 irrespective of cash payment.
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