Question

how are revenue and expenses reported on the income statement under cash basis of accounting and the accrual basis of accounting?

Answer 1

2.5 Basis of Accounting : There are two important basis for recognising revenue in accounting from the view point of the timing of recognition of income and expenditure. These approaches are Cash basis and Accrual basis. Cash Basis : On the cash basis, incomes and expenses are identified only on the date of receipt or payment of cash, but not on the date of transaction. The realisation in cash of a transaction is only considered. The cash basis is adopted when there is doubt regarding the realisation of payment from the party. In case of sales on Hire Purchase and Instalments, payment is made in certain instalments, split over a period of certain years. B. Accounts of professionals and government concerns are made on this basis. Outstanding expenses like salary or rent of last month of the year paid in subsequent month of next year, or incomes receivable are not included. Credit sales or credit purchases are also excluded from this purview. Hence, this system considers just cash realisation of the transaction but not the related period of the transaction. Accrual Basis: According to accrual basis revenue and expenses are recognised when they occur rather than when they are actually received or paid in cash. Revenue and expenses are supposed to be generated when legal right to receive payments and legal obligation to make payments are established. Under this system, the revenue is recognised in the period of its occurrence and not in the period of its actual receipts or payments in cash. Example, Credit sale

fe for the month of December 2010, realised in March, 2011, will be recorded in the books, as December 2010 only. In the same way outstanding rent payable for the month of December 2010 will be recorded in the books, during December 2010 only, and we shall not be waiting for the actual date of payment. It is a widely accepted method as it considers the date on which transaction occurs. As such, it facilitates matching revenue and expense of the period and determines the profit earned during the period. Differences between Cash Basis and Accrual Basis: Points of Difference Cash Basis Accrual Basis Basis of transactions It is based on cash transactions. It is based on cash and credit transactions. Adjustments Accounting is simple as it does not involve the adjustments. Accounting involves the adjustments while preparing financial statements. Reliability It is not reliable, because it considers only the cash transactions. It is more reliable and accurate as it considers both cash and credit transactions. Results Financial Statements would not Financial Statements would reveal accurate profit & results. reveal accurate results. Users Professionals, small concerns, non- | All business organisations. trading concerns, Government departments.

If you are benefited from the solution then please LIKE , if disliked then please specify the reason.