Question

Differentiate between accrual basis and cash basis of accounting.

Answer 1

The differences between accrual basis and cash basis of accounting are:

$\begin{array}{ccc}\text{Basis}& \text{Accrual Basis of Accounting}& \text{Cash Basis of Accounting}\\ \text{Nature of Transactions}& \text{Both cash and credit transactions are recorded.}& \text{Only cash transactions are recorded.}\\ \text{Advance/Outstanding}& \text{These are adjusted in profit and loss account}& \text{These are not adjusted in profit and loss account nor}\\ \text{Incomes and Expenses}& \text{and shown in balance sheet.}& \text{shown in balance sheet.}\\ \text{Reliability of Profits}& \text{Correct profit or loss is ascertained because it}& \text{Correct profit or loss is not ascertained because it}\\ & \text{records both cash and credit transactions.}& \text{records only cash transactions.}\\ \text{Accounting Knowledge}& \text{The accrual basis of accounting requires}& \text{It does not require much of accounting knowledge,}\\ & \text{accounting knowledge,as many adjustments of}& \text{as only cash receipts and cash payments are}\\ & \text{advance,outstanding,capital and revenue are to}& \text{considered for financial statements.}\\ & \text{be carried out in financial statements.}& \\ \text{Legal Position}& \text{Accrual basis of accounting is recognised by the}& \text{Cash basis of accounting is not recognised by the}\\ & \text{Companies Act,2013}& \text{Companies Act,2013}\\ \text{Acceptability}& \text{Accrual basis of accounting is more acceptable}& \text{Cash basis of accounting is not acceptable in}\\ & \text{in business,as it reveals correct income and}& \text{business as it does not reveal the required}\\ & \text{expense besides assets and liabilities.}& \text{information.}\\ \text{Suitability}& \text{This basis is suitable for business.}& \text{This basis is suitable for non-for-profit organisation}\\ & & \text{and professionals like,doctors,lawyers,Chartered Accountants,etc.}\end{array}$