▸ Under accrual basis of accounting, ▸ The accrual method records revenue

revenue and expenses are recognised when a product or service is delivered

and recorded when they occur and not to a customer with the expectation
when the cash is received that money will be paid in the future.

▸ Accrual basis of accounting focuses on ▸ Expenses of goods and services are

anticipated revenue and expenses recorded despite no cash being paid
out yet for those expenses.

▸ Accrual basis of accounting portrays a

more accurate portrait of a company’s
i health by including accounts payable
and accounts receivable

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▸ Cash basis accounting lies in the
timing of when revenue and ▸ Cash basis accounting is less
expenses are recognized. accurate than accrual
accounting in the short term.

▸ The cash method is a more

immediate recognition of revenue ▸ Cash basis accounting is
and expenses. simpler and less expensive

▸ Revenue is reported on the income

statement only when cash is
received. Expenses are only
recorded when cash is paid out

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Advantages and disadvantages of
Accrual basis of accounting
Advantages: Disadvantages
1. It provides an accurate picture of 1. Small companies might
overall cash flow for the business. lack the staff needed to
2. It's the preferred method for manage this method
GAAP. 2. It can lead to deception
3. Investors prefer accrual (easier to cover up frauds
accounting. and to scam)
4. Accrual accounting gives 3. Cash Flow Uncertainties
companies a truer depiction of (profits are already
their resources and financial accounted for before
responsibilities. receiving it)
4. Difficult Calculations are
used
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Advantages and disadvantages of cash
basis accounting
Advantages: Disadvantages
1. Small business owners and
1. Restricted use (sell products or
independent contractors who
services on credit,need inventory
carry no inventory can choose
to account for income cash basis
cash basis accounting
accounting can’t be used)
2. Ease of use (You only use cash
2. Single-Entry System, increases
accounts)
chances of error
3. Exists in the present(lets you
easily see how much cash you 3. Short-Term Indicator(it may offer
actually have on hand.) a misleading picture of
longer-term profitability)

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Timing of when revenue and Accrual basis of accounting has
expenses are recognized differs complex accounts(accrual
income, prepaid expense etc)
Accrual basis of accounting is a whereas cash basis only has cash
method of GAAP, cash basis account
accounting is not
Small business and sole
proprietorships use cash basis of In cash basis of accounting only
accounts and big companies use cash transaction are recorded
accrual basis of accounting whereas in accrual basis
accounting cash and credit
transaction are recorded
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