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Differentiate cash accounting and accrual accounting.
The major differences between cash accounting and accrual accounting are as follows −
Revenue and expenses are recognized when it’s made through cash only.
Simple and intuitive.
Not recognized by GAAP.
No holistic approach.
Tax are not paid for money yet to receive.
Mostly used by small business or sole proprietors.
Focus on liquidity.
Not more accurate.
Helps to estimate how much cash is generated.
All expenses and revenue are recognized.
It is complex and difficult to understand.
Recognised by GAAP and companies act.
Tax paid on paid for money yet to receive.
Mostly used by business having high revenues.
Focus on revenue/expenses/profit/loss.
Helps to estimate how much loss or profit occurred in a period.
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