Accrual and Cash Basis Accounting

There are 2 ways to accounting-Accrual basis & cash basis accounting.Accrual & Cash are two primary methods of recognizing expenses and revenues in accounting. This free online accounting training tutorial will help you to understand:

  • Meaning & Definition of Accrual Basis Accounting
  • Meaning & Definition of Cash Basis Accounting
  • Difference between Accrual & Cash Basis Accounting
  • Accrual Basis vs Cash Basis Accounting

Accrual Basis Accounting: Under the Accrual basis accounting, the accountants record the effect of the transaction as it happens. The most featured example is that the revenues are recorded or recognized when revenues are earned without regard for the received of cash in the same way expenses are recorded when expenses are incurred without regard for payment of cash. Accrual basis accounting mainly focuses on the recording of revenues and expenses as they occur within the proper accounting period rather than focusing on the period when cash is received or paid.

Most of the company’s record transactions are under accrual basis accounting. The four concepts: Time period concept, accounting period, revenue recognition, and matching principle are used in accrual basis accounting.

Cash Basis Accounting: Cash basis accounting is the reverse way to record transactions. Under Cash basis accounting the revenue is recorded only when cash is received and expenses are recorded only when cash is paid. Under cash-basis accounting the accountants do not record any receivable, payable and amortization. Cash basis accounting is not always a proper way to do accounting because it cannot provide the correct financial statement.

Revenues and expenses could not be recognized within the proper accounting period and expenses failed to match with the revenues under cash basis accounting. Moreover, cash basis accounting does not follow the principle of GAAP (Generally Accepted Accounting Principle). Mainly small companies record their transactions under cash basis accounting.

Example: ABC Company sold equipment at 5000 $ to XYZ company on account. Under the accrual basis accounting ABC company records the transaction as follows:

XYZ Company …Dr.
Sales Revenue…Cr.

Under the accrual basis accounting, ABC company will report the accounts receivable as an asset in the balance sheet and the sales revenue in the income statement but under the cash basis accounting ABC company will not record this transaction as yet they don™t get any cash payment. Cash basis accounting only deals with the cash payment and cash received.

Training Videos: For better understanding let’s watch some Free online video lectures on Accrual & Cash Basis Accounting:

Video-1: Accrual and Cash Basis Accounting:

Video-2: Accrual Basis Vs Cash Basis Accounting:






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