Question

Explain the difference between cash basis and accrual basis accounting. The student may define/explain and give example for both cash basis and accrual basis computation of accounting net income

Answer 1

Answer)

Cahs basis accounting recognises revenue or expense only when such revenue is received in cash or expense is paid in cash.

For example,There is a pending freight bill of $25.It will be found in income statement only if cash is paid before the end of year.

Accrual basis of accounting will record revenue when it is earned and an expense when it is incurred regardless when it is paid or received.

For example,the freight bill mentioned above will be shown in the current year income statement even if it is paid next year as that expense is incurred in current year.