Chapter 3, Problem 1DQ

What is the difference between the cash basis and the accrual basis of accounting?

Summary Introduction

Concept introduction:

Accounting is done either on the cash basis or the accrual basis. Under the cash basis of accounting, the transactions are recorded only based on the movement of cash. Under the accrual basis of accounting, the transactions are recorded on the accrual basis, which may be in cash or not. 

To indicate: the difference between the cash basis and accrual basis of accounting. 

Explanation of Solution

The difference between the cash basis and accrual basis of accounting is explained as follows:

1. Under the cash basis of accounting the cash receipts are considered as revenue and cash payments are considered as expenses and net income is calculated on a cash basis.
2. Under the accrual basis of accounting, the revenue and expenses are recorded on an accrual basis irrespective of the cash transactions and net income is calculated on an accrual basis.