Cash vs Accrual Accounting
(1.) What are the differences between cash and accrual basis accounting? Provide an example of each.,
(2.) Accrual accounting requires adjusting entries. Provide an example of an adjusting entry.
(1) Differences Between Cash and Accrual Basis Accounting
Cash Basis Accounting:
- Revenue and expenses are recorded only when cash is received or paid.
- Simpler and commonly used by small businesses.
- Does not account for accounts receivable or payable.
Example:
A business provides a service on January 15 but receives payment on February 1. Under cash basis accounting, the revenue is recorded on February 1 when the payment is received.
Accrual Basis Accounting:
- Revenue is recorded when earned, and expenses are recorded when incurred, regardless of when cash is exchanged.
- Provides a more accurate financial picture and is required by Generally Accepted Accounting Principles (GAAP) for larger businesses…
(1) Differences Between Cash and Accrual Basis Accounting
Cash Basis Accounting:
- Revenue and expenses are recorded only when cash is received or paid.
- Simpler and commonly used by small businesses.
- Does not account for accounts receivable or payable.
Example:
A business provides a service on January 15 but receives payment on February 1. Under cash basis accounting, the revenue is recorded on February 1 when the payment is received.
Accrual Basis Accounting:
- Revenue is recorded when earned, and expenses are recorded when incurred, regardless of when cash is exchanged.
- Provides a more accurate financial picture and is required by Generally Accepted Accounting Principles (GAAP) for larger businesses…
(1) Differences Between Cash and Accrual Basis Accounting
Cash Basis Accounting:
- Revenue and expenses are recorded only when cash is received or paid.
- Simpler and commonly used by small businesses.
- Does not account for accounts receivable or payable.
Example:
A business provides a service on January 15 but receives payment on February 1. Under cash basis accounting, the revenue is recorded on February 1 when the payment is received.
Accrual Basis Accounting:
- Revenue is recorded when earned, and expenses are recorded when incurred, regardless of when cash is exchanged.
- Provides a more accurate financial picture and is required by Generally Accepted Accounting Principles (GAAP) for larger businesses…
