Accrual and Cash Basis Accounting

There are two main types of accounting businesses used to keep record of revenues, expenses, and other accounts. These two types of accounting is Accrual Basis Accounting and Cash Basis Accounting. Knowing what type of business it is, determines the type of accounting system it uses. Cash Basis accounting is when activities of and transactions that take place involving income and expenses is used with cash only. Accrual basis accounting represents all of the accounts that accrue revenue and expenses that may or may not have been received or earned. This accounting method is used mostly for larger business, because they have a great deal of revenue and expenses that need to be recorded so that they can be accounted for properly on financial statements.

There are many pros and cons that come along in both aspects of the accounting methods. The advantages of a cash basis system is, since it only records revenue and expenses when they actually appear in your account, you know how much cash you have on hand in the particular moment. (Cash vs. Accrual Pros and Cons 2010). The cons would be that it can give a false overlook of the financial statements because all revenue and expense have not been accrued. It shows just what effects the account balance of cash, and may under or overstate cash balances.

Although, widely used, the accrual method of accounting can also have its many pros and cons. The advantage to using an accrual based accounting system is that can see an overview of the actual picture of operations. (Cash vs. Accrual Pros and Cons 2010). You can see exactly how many sales we have accrued and also expenses to give a more accurate look at financial statements. The disadvantages when using this system is that it doesn't give an outlook on how well the flow of cash is. Even though we may accrue revenue, it doesn't mean we have the actual money into our accounts.