Difference between Cash Basis and Accrual Basis of Accounting

In the world of accounting, there are two methods of recording accounting transactions, which are cash basis and accrual basis.

While the cash basis method of recording involves immediate recognising of any expenses and revenues, the accrual basis is based on anticipation of the expenses and revenues.

In other words, the cash basis of accounting recognises the expenses incurred and revenues earned immediately, when money changes hands between two parties involved in the transaction.

Whereas, the accrual basis of accounting recognises expenses when they are billed (not paid) and revenues when they are earned.

Cash basis of accounting is adopted by small businesses while large corporations and publicly traded companies prefer the accrual method.

Let us discuss some of the points of difference between the cash basis of accounting and accrual basis of accounting.

Cash Basis of Accounting

Accrual basis of Accounting

Definition

It is that basis of accounting where any income or expense is recognised only when there is an inflow or outflow of cash

It is that basis of accounting where any income or expense is recognised when it is earned/ incurred, irrespective of the time when it is paid/ collected

Nature

Cash basis is simple in nature

Accrual basis is complex in nature

Accounting system followed

Cash basis of accounting follows the single entry system that records either inflow or outflow of cash

It follows a double entry system of accounting where each transaction has two outcomes in the form of debit and credit

Variations in Income Statement

Income statement will show a relatively lower income under cash basis of accounting

Income statement will show higher income levels under the accrual basis of accounting

Accuracy

Cash basis of accounting has low accuracy

Accrual basis of accounting is more accurate than the cash basis of accounting

Auditing of Financial Statements

Under cash basis of accounting financial statements cannot be audited

Financial statements can be audited only when they are prepared using accrual basis of accounting

Suitable for

Cash basis of accounting is suitable for micro to small businesses

Accrual basis of accounting is suitable for large corporations

This article was all about the topic of difference between Cash Basis and Accrual Basis of Accounting, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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1 Comment

  1. Thanks for the help

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