Essay: The Cash Basis and Accrual Basis of Accounting

Essay: The Cash Basis and Accrual Basis of Accounting
June 8, 2011 Comments Off on Essay: The Cash Basis and Accrual Basis of Accounting Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The cash basis and accrual basis of accounting differ from each other due to differences in recognition of revenues and expenses. The accrual basis of accounting recognizes revenues when the risks and rewards of the product or service have been transferred to the customer irrelevant of cash receipts and expenses are recognized when the company has used up or received benefit from a service or product irrelevant of cash payments. The cash basis of accounting on the other hand recognizes revenues and expenses on the basis of cash receipts and cash payments.

If a company uses the cash basis of accounting the information provided in the financial statements of that company would not be reasonable and insufficient to make practical decisions. The income of the company will be a mere difference in the cash receipts and cash payments rather than a complete reflection of operations carried out in the company. The revenues and expenses of a certain period would not match under the cash basis of accounting and it would be impossible to ascertain the accurate net income of a specific period. The cash basis of accounting is usually not recommended for large organizations but it is allowed by some specific standards (Gibson, 1998).

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