Differentiate cash accounting and accrual accounting.

The major differences between cash accounting and accrual accounting are as follows −

Cash accounting

• 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.

Accrual accounting

• All expenses and revenue are recognized.

• It is complex and difficult to understand.

• Recognised by GAAP and companies act.

• Holistic approach.

• Tax paid on paid for money yet to receive.

• Mostly used by business having high revenues.

• Focus on revenue/expenses/profit/loss.

• More accurate.

• Helps to estimate how much loss or profit occurred in a period.