Question

Explain the difference between the cash and accrual basis. Which would you recommend and why?

Answer 1

There are mainly two basis of accounting namely cash basis and accrual basis of accounting. There are several differences between cash and accrual basis of accounting. However, the main difference is the period when the revenue is recognized. In case of cash basis of accounting revenue and expenses are recognised as soon as cash is exchanged. While accrual basis anticipates revenues and expenses in advance. Cash basis is also easier in its approach than accrual basis of accounting.

Accrual basis of accounting provides better accurate picture of revenues and expenses for a given period of time. In this way it enables a good analysis of gross profit, operating profit and profit margin. Thus accrual basis of accounting is recommended as it helps in making better management decisions.