Accrual based accounting


2 Answer(s)


Cash-based accounting recognizes revenue and expenses when cash is actually received or paid out; accrual accounting recognizes revenue when collection is reasonably certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash. Most large companies use accrual accounting because paying with credit cards and lines of credit is so prevalent these days; very small businesses may use cash-based accounting to simplify their financial statements.


Diff between cash and accrual based accounting:
1. In cash system of accounting, revenue is recorded when cash is actually received. In accrual system revenue is recorded irrespective of receipt of revenue in cash or bank
2. In cash system no provisions are made. Provisions can only be made in accrual basis of accounting
3. Cash system does not account for depreciation. Accrual system accounts for depreciation