Question

In my accounting class we are being asked to comment on posts that other students make. I need help with a response/post to the comment that is below. Any help you can give me would be appreciated. I also MUST include a reference with my comment so if you could include a reference that would be so helpful! THANK YOU!

When it comes to recording cash and accrual basis transactions, they are both very important n account but there are a few differences regarding how they are being recorded. Cash basis type of transactions are recorded immediately. In this case, “the cash method is mostly used by small businesses and for personal finances”. (Morah, 2020). Overall, cash basis type transactions are not record until cash is received.

On the other hand, the accrual basis of accounting is more geared towards transactions that are supposed to be paid by the customer once the product or service is received. I think for my own personal analogy, it operates on the same lines of how we see credit-based transactions where the cash is received later instead of immediately. Simply put, “expenses of goods and services are recorded despite no cash being paid out yet for those expenses”. (Morah, 2020). This method of accounting is more used by larger type companies.

Although, both type of transactions is equally as important, the cash basis however is much easier to record than the accrual basis.

Answer 1

There are two methods of Accounting to record any transaction-

1. Cash basis
2. Accrual basis

Both of it has it's own Pros and cons.

While cash basis say to record a transaction as and when cash is given or received irrespective of its occurance but accural basis say to record a transaction as and when it is occurred no matter cash is being given or received.

For example, Mr.X make a sale to Mr.Y worth$2000 on Credit.

Now say Mr X follows cash basis, he will not record this sale in his books because cash is not received

But say Mr Y follows accural basis, so he'll record it as his credit purchases along with recording Mr X as his creditor.

Accural basis follows matching principle of Accounting which cash basis doesn't follow. So for this reason while making financial statements we calculate provisions, prepaid expenses etc only in accrual basis.

Moreover small proprietors follow cash system due to ease of accounting as they may not be aware of Accounting standards and principles used in accural basis. But it's always preferred to use accrual accounting system.