Similarities And Difference Between Cash And Accrual Basis Of Accounting

Cash and Accrual Basis

The basis of accounting consists of two main parts. First is the cash or modified accrual basis and the other is the accrual basis. Both the cash and accrual basis of accounting are widely accepted principles within the accounting field that assist with keeping accurate notation of the income and expenses when dealing with a business. The main difference between the cash and accrual basis is the time at which revenues and expenses are reported on the income statement. (1) A specific criterion has to be followed in order to choose which accounting method should be executed. (1)

The cash basis simply identifies revenues only in the period in which cash is available and received. (1) In other words, the amount of

In most cases, smaller companies use the cash basis method because it makes it easier to keep an accurate record of the amount of cash flow in a company. The accrual basis on the other hand helps with keeping revenues and expenses in the same period in which they occur, therefore creating a more accurate overall picture of the standing of the business/company. This method can only be applied to company whose revenue does not exceed $5 million on a yearly basis Smaller companies however make it easier to account for transactions since there aren’t any complex accounting transactions occurring, such as deferrals. With the timing of cash receipts and expenses not mandating to be done in the same period, profits can fluctuate between high and low and not accurately reflect. In contrast, larger companies use the accrual method. Larger companies are usually companies with sales exceeding $5 million on a yearly basis. Financial statements can only be audited if they are prepared using the accrual basis. The accrual basis allows for revenues and expenses to be matched in the same period so that profitability is accurate and organized. In the end there is no ability to generate cash unless a statement of cash flows is created. With the cash basis method being quicker and easier to use for businesses that don’t’ conduct their business on credit, it allows for the performance of the company