Business Finance Homework Help

Discuss the differences between cash based and accrual based accounting. List examples when each system is used.

Student Response:

Cash based and accrual based accounting are methods used to record accounting transitions. The main difference between them is the timing of the transaction recording. In cash basis, revenue and expenses is a more immediate recognition, while accrual basis focuses on anticipated revenue and expenses . A benefit to cash basis accounting is its easy to use since it only accounts for cash paid/received. It is also easier to track the cash flow in a business using the cash basis system. A benefit for using the accrual based accounting is it is includes both accounts receivable and account payable so it shows a more accurate description of the long term probability of a company. An example of accrual based accounting would be if a customer decides to receive services on a account. Even though the company didn’t receive cash, the revenue is still recorded at the time they perform the services. When the company does receive the cash later, they don’t record it because the company had already recorded it. An example of cash basis accounting would be if a company could perform work for a year and not receive payment until the next year. The revenue is not recorded until the cash is actually received.