Difference Between Accrual Basis and Cash Basis

Introduction This paper will analyze and discuss the advantages and limitations of cash basis accounting and accrual accounting and determine the possibility of overcoming their limitations . In addition this will talk about using cash flow statement for cash management .2 . Analysis and Discussion 2 .1 Accrual basis accounting compared with cash basis accounting Before trying to understand the advantages and limitation of each method , it is proper to understand their distinction . The first distinction lies in the timing of recording of income or expense . Under accrual accounting , income is reported in the period that it is earned ,which may or may not correspond with the time of receipt . If income corresponds with receipt it is a cash sale transaction , otherwise the receipt could be explained in many ways as will be explained later . The same is true with the recording of expenses , where under accrual accounting , an expense must be recognized when the expense is incurred regardless when the payment or actual outflow of cash is made . Compared with cash accounting , the cash receipt is recorded as revenue when it is received , and expenses are deducted in the period when they are paid .State in another way , time of recording of revenues and expenses corresponds with the time of earning or incurring prevails in accrual accounting as against time of collecting or paying in the form of cash that corresponds to income and expense under cash accounting . The other distinction is on the users of the accounting method .Corporations and partnerships are required to use the accrual accounting over that of cash accounting since accrual accounting is the one that is supported by the US Generally Accepted Accounting Principles (GAAP ) and even the International Accounting Standards (IAS ) or International Financial Reporting Standards (IFRS . European Union corporations are required to use IAS and IFRS . Microsoft Office Online admitted the use of accrual accounting by "all publicly traded companies and most large businesses ' while cash accounting is occasionally used by individuals for simplicity purposes when they file income tax returns . Thus , Ward agreed that the method of accounting legally required to be used by most business and professionals is the accrual basis of accounting . The other distinction between the two methods is the absence of other accounts in the other method . Microsoft Office Online pointed some of the differences between the two methods . One is the fact the there are no receivables or payables in a balance sheet prepared under cash basis accounting . Receivable and payable may also take the forms of accrued revenues and accrued expenses respectively . When revenue is recognized before cash is received the same is know as accrued revenue or account receivable which is part of the current assets . But it is also possible to have received cash in accrual accounting and yet there is yet no revenue . Such is called