In this article, we will learn in-depth about accrual vs cash basis accounting, and much more.
The basis for recording the transaction
Due to differences in the basis of accounting, homogeneous events are recorded in one organization but may not be recorded in another organization.
There are two types of accounting
- Accrual Basis Accounting
- Cash Basis Accounting
What is Accrual Basis Accounting?
The directive of accrual basis accounting is that the transactions that change the financial position of the Institutions are recorded only when events take place.
On this basis, it is recognized as income only when income is earned (even if cash is not received). Again, it is recognized as an expenditure only when the expenditure is incurred (even if the expenditure is not paid in cash).
That is, the outstanding income and expenditure are also recognized as income and expenditure. Large companies perform accounting on an accrual basis.
The accrual basis accounting is done on the basis of generally accepted accounting principles established on a modern accounting basis.
Accrued and prepaid income and expenses are recorded in an accounting book according to accrual basis accounting.
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What is Cash Basis Accounting?
The directive of cash-basis accounting is that income is recorded only when cash payments are received and expenses are recorded only when cash payments are paid.
On this basis, income is earned but it is not recorded if the cash is not received and the expenditure is incurred but it is not recorded if the cash is not paid for expenditure. In other cases, cash receipts, and cash payments are recorded only in the event of occurrence.
Some small companies and government institutions perform accounting on a cash basis. The cash basis accounting is inconsistent with the generally accepted accounting principles (GAAP). Tax accounting is prepared based on a cash basis accounting.
Difference between Accrual and Cash Basis Accounting
The comparative difference between accrual and cash basis accounting is stated below
|Sl No.||Cash Basis Accounting||Accrual Basis Accounting|
|1.||Income is recorded only when income is earned even if cash is not received.||Income is recorded only when cash is received as an income.|
|2.||Expenditure is recorded only when expenditure is incurred even if cash is not paid.||Expenditure is recorded only when cash is paid for expenditure.|
|3.||Other transactions are recorded only as they occur even if cash is not paid or received.||Other transactions are recorded only when cash is paid or received.|
|4.||Consistent with GAAP||Inconsistent with GAAP|