Question

Briefly describe the difference between cash and accrual methods of record keeping.

Answer 1

Accrual basis and cash basis are two methods of accounting used to record transactions.

Accrual Basis: The transaction and revenue are recorded when earned and expenses are recorded when consumed.

Cash Basis: The transaction and revenue are recorded when cash is received from customers. Expenses are recorded when cash is paid to suppliers and employees.

Main Difference Between Cash and Accrual Accounting.

The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recorded and recognized. Cash basis method is more immediate in recognizing revenue and expenses, while the accrual basis method of accounting focuses on anticipated revenue and expenses.

Here are some examples that apply these concepts:

Revenue Recognition

A company sells $20,000 of product to a customer in August. The customer pays that invoice in September. With the cash basis method, the company recognizes the sale in September, when cash is received. Whereas with the accrual basis accounting, the company recognizes the sale in August, when it is issued the invoice.

Expense Recognition

A company buys $700 of office supplies in March, which it pays for in April. With the cash basis method, the company recognizes the purchase in April, when it pays the bill. Whereas with the accrual basis accounting, the company recognizes the purchase in March, when it received the supplier invoice.