How Accrual Basis of Accounting Differ from Cash Basis of Accounting
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How Accrual Basis of Accounting Differ from Cash Basis of Accounting
Revenues and expenses of individuals and institutions can be recognized at different times and on payments, whether money is received or not. The methodologies to identify income and costs in accounting differ from basis and individuals and organizations realize how the cash involved. The methods present different bottom lines and they can apply to different financial needs (Caylor, 2010). Cash basis is commonly used by those businesses that do not have inventories as opposed to an accrual basis. A characteristic difference to note therefore is that the cash basis is common to small businesses as accrual basis to expanded businesses.
Timing of revenues and costs is another difference where the cash basis recognizes revenues when money is received and expenses when money is paid out without the accounts receivables or payables. Accrual basis recognizes income once earned even before the actual cash payment and records occurrence of any costs incurred (Bradshaw, Bens, Frost, Gordon, McVay, Miller, & Wong, 2013). The significance of these methods is huge, and a real picture of business profitability comes about through the accrual basis since all the accrued transactions are actual activities of a company (Lim, 2012). Cash basis would assume other operations that portray little information about the company that may make it difficult to undertake action.
The cash basis is simple and flexible, only taking into consideration cash flows though it does not take control of receivable and payable accounts (Collins, & McInnis, 2011). The accrual method is widely acceptable and used by larger companies giving a picture of actual revenue and expenditures a business incur (Demski, 2013). Revenue to be realized is taken into account on delivery of goods or services already offered. Realization principle ensures that non-cash resources are recognized and converted into cash and those revenues recognized the moment products and services are delivered giving earnings (Modell, 2010).