Question

1. How does depreciation represent a difference between the accrual basis of accounting versus a cash basis?

Answer 1

Under accrual basis accounting, all revenues are recognized in accounting records as and when they are accrued, irrespective of time of collection of cash for the same. On the other hand, under cash basis accounting, revenues are recognized only when they are collected, irrespective of time of accrual of the same. Under accrual basis accounting, all expenses are recognized in accounting records as and when they are incurred, irrespective of time of payment of cash for the same. On the other hand, under cash basis accounting, expenses are recognized only when they are paid, irrespective of time of incurring the same. Depreciation expense is a non-cash expense recorded in accounting records to amortize or depreciate capitalized asset cost over its economic life, based on method of depreciation adopted by the firm. As a result, depreciation expense shall be recognized as an expense under accrual accounting method whereas it will not be recorded in accounting records under cash basis accounting as it doesn't involve any cash outflow. Depreciation represents a difference between the accrual basis of accounting versus a cash basis in terms of higher net income or less expense under cash basis because depreciation is not recognized as an expense under cash basis, as explained above. In other words, Depreciation represents a difference between the accrual basis of accounting versus a cash basis in terms of lower net income or higher expense under accrual basis because depreciation is recognized as an expense under accrual basis accounting.